This month’s guest post is brought to you by Lorne Noble of Simple Startup. Having started his own business and worked with CPG businesses in a variety of stages of growth, he shares his insights on how  to improve your startup financial strategy and poise your business for long-term success and sustainability.

5 Tips to Improve Your Startup Financial Strategy

Startup entrepreneurs are like a mash up between Indiana Jones and Macgyver. They’re huge risk takers. They’re innovative. They can make something out of nothing, and they’re basically up to any challenge. And even further still, everyone is rooting for them! The one thing startup entrepreneurs, Indiana Jones, and Macgyver don’t have in common is that they don’t always survive at the end of the day. Nearly 50% of startups fail in their first five years of operation. 50% is not a happy number.

If you look into why this high failure rate occurs, a number of factors are at play. Scaling too quickly, lack of product-market fit, and financial problems top the list. Better financial planning to ensure a more sustainable business model is an easy way to ensure that your startup stands a chance of making it.

In today’s post, we’ll cover 5 tips to improve your startup financial strategy. Sound financial management begins with building a financial model and extends to keeping your books clean from the start. It also includes making numbers-based decisions, preparing for the unexpected, and embracing change.

Tip 1: Build a Financial Model (and Monitor It)

I’ve had the opportunity to converse and work with a variety of entrepreneurs ranging from CPG startups to app-based mental health companies. From these conversations, I’ve come to one major conclusion — business owners don’t love surprises. This brings me to a second conclusion. Anything an entrepreneur can do to better understand their business, their industry, and their numbers is time well spent.

Building a financial model is foundational to improving your financial strategy. Financial models enable you to run scenarios, test and adjust your business strategy, and forecast for the future. Beyond having access to the model itself, the process of building the model itself is an educational opportunity.

Understand and Test Your Assumptions

Building a solid financial model requires that you input your initial assumptions about your business and see how they stack up in reality. For instance, what do your monthly sales look like, and how do you assume they grow over time? Is that growth rate high enough to help you achieve your business’s financial goals? What might you do to help drive up your growth rate to improve your financial forecast? Depending on what you learn from your model building, you can re-forecast with new assumptions and make changes to solidify your initial plans based on market data.

Update Your Model Frequently

The one caveat of the financial model is that you have to actually use it to monitor your progress. You must let yourself fail fast, make quick pivots, and adjust your business and financial strategy as needed. Update your model accordingly. If you’re not using the model as a tool, then you will not reap the benefits of having built one in the first place. Above all, the process of developing your financial model gives you the opportunity for growth and improvement, which will ultimately help you grow a stronger business and be a better owner and leader.

Do You Really Have to Build a Financial Model?

If you still think building a financial model is for the birds, I’ll keep harping on this one. Investors and employees love amazing companies — and how do you become an amazing company? By getting clear on the future of your business, which is to say the sustainability of your financial model. You should have a REAL plan for achieving your future goals. Without a model you’ll be navigating blindly based on your gut feelings on any given day, which is not effective in the long run, and certainly won’t convince investors or employees to believe in the future of your venture.

Tip 2: Keep Your Books Clean from the Start

My second tip for how to improve your startup financial strategy is to keep your books clean from the start. I know startup businesses can be short staffed and founders get busy putting out fires that inevitably arise on the daily. So they think imperfect books will do for now or I can take care of this later. And to that I say, at what cost? Unfurling messy books can be costly especially with errors compounding over time. Additionally, businesses risk missed opportunities and inefficiencies if they don’t have accurate visibility into their numbers.

Do Not DIY Your Books

Yes, there are some things that make sense to DIY for your business, like painting your office. It can save you money and is fun (if you like that kind of thing), but at the same time it is super low risk. I’m just going to say it, your business’s accounting is best left to a professional accountant. DIY accounting is NOT low risk and most people don’t find it very fun either.

The margin of error when it comes to a business’s finances is not big. Accurate numbers give you visibility into your company’s health. Additionally, they are absolutely necessary for applying for a business loan, pitching to investors, raising capital, managing business taxes, and allocating resources. Get your numbers right.

Hire a Professional Accountant

Working with a professional accountant also limits the potential for mistakes. It adds credibility to your numbers and ensures you meet GAAP compliance. Working with the right accountant can also give you much-needed insight into your financial trends through reporting. There are countless opportunities you might miss when your books are messy.

Lastly, as a business owner you should be working on your business, not in your business. Hiring a professional to take on your accounting plays a big part in helping you step back. You can and should spend your time managing more important and strategic aspects of your business.

Tip 3: Make Numbers-Based Decisions

The topic of knowing your numbers has come up a few times in our discussion already, but the reason it is so important is because they allow you to make more informed decisions about your financial strategy (and really any business strategy).

So what is a numbers-based decision? It’s a choice or conclusion that is based on the core needs of your business made from concrete numbers and facts. I think, when you phrase it like that, who wouldn’t want to make numbers-based decisions?

Track Metrics to Improve your Startup Financial Strategy

Making numbers-based decisions begins with tracking your metrics. Choosing the right metrics to track will depend upon your business. You might consider your specific industry, stage of growth, your business goals, and any number of other factors. By choosing relevant, simple-to-track, and easy-to-understand metrics, you will be able to monitor and magnify what’s important so you can have a good gauge on the health of your business.

With these metrics at the forefront you will be able to make more informed, more effective, and more efficient decisions. One of the best way to improve your startup financial strategy is to ensure that you are tracking metrics that align with the core needs of your business.

Identify Your Critical Number

One final word of wisdom in regards to decision-making based upon numbers — metrics can become overwhelming. There are certainly a lot of them that can be tracked to relay information about every aspect of your business from sales to operations and marketing. Where do you focus?

Before you become overwhelmed by the sheer number of metrics that can be tracked, I want you to identify one single number — your critical number — that will indicate to you that business is going well. For example, a restaurant may track food and labor costs as a percentage of sales, or a manufacturing firm may look at inventory turnover.

Distilling your metrics down to one critical number will allow you to cut through the noise and focus more succinctly on a core business activity that everything else flows from. Keeping a pulse on your critical number lets you clearly see how your business is functioning. You’ll be in a better position to make informed financial decisions based on your business’s core needs. You can also use this critical number to orient your team towards prioritizing the right activities.

Tip 4: Prepare for the Unexpected

Preparing for the unexpected is easier said than done, but I have a little trick to help with being proactive in this area. How you prepare for the unexpected is to know where you are today. For example, if you’ve been tracking your sales metrics, you’ll be able to identify a sudden 30% drop in sales. You’ll also be able to use your financial model to understand what changes you might make. For instance, adding more capital to your advertising budget may help you make up for lost sales through additional customer leads.

No business owner or entrepreneur can ever truly know what is around the corner for their business or market segment. When 2020 began we all thought it was going to be a normal year, but lo and behold, some pretty wild obstacles were handed to us. Covid-19 has impacted almost every single aspect of daily life. But if we look back in the annals of history, nearly every decade has included some kind of life-changing, world-changing event. The unexpected is something we can realistically prepare for by consistently delivering good margins, honing in on bottom line growth (rather than top line growth), and being efficient with cash management.

Clear Up Money-Related Misconceptions

Preparing for the unexpected may be difficult at first, but if you change your mindset around a few common misconceptions startups often have, then it will be easier to think in terms of preparedness. Early stage startups seem to struggle with a few money-related misconceptions. Founders make the mistake of thinking that more money will be available. That their money will last longer than they think. Or that they can get away with not understanding or caring about the money. But if you start your business planning with the idea that money can be limited and that having an accurate vision of your cash flow is important, you’ll be positioned to mitigate the effect of surprises and even black swan events like COVID-19.

A Preparedness Impact Example

A good example of what a little preparation can do is something I’ve come across in our work with CPG startups. These startups work with BIG food wholesalers and distributors that have a lot of billbacks and chargebacks.  Time and again, these fees are barely accounted for in the company budget and financial plan. Chargebacks can be incurred for a number of reasons, including improper labeling, late or early deliveries, shortages, improper packing, etc.

With a little preparation and financial forethought, retail-related fees can be more accurately budgeted for. Accurate budgeting gives CPG startups a more sustainable financial model from which to operate. This financial forethought can be served well by a good accounting partner who will ensure accurate financial data (so the level of chargeback fees are not a surprise). A good accounting partner will also use historical company data to properly forecast future fees and even fight inaccurate chargebacks and other fees.

Tip 5: Embrace Change

Embracing change might be one of my favorite startup tips besides building a financial model (because I love them!). You have to embrace change if you’re going to be successful in your business. Cultivate your most open mind and see what happens. Remember that part of the usefulness of a financial model is the activity of monitoring it and manipulating it? This exercise is really an opportunity for you to embrace change, manage surprises, and ultimately become a more innovative and sound company and business leader.

Imagine being one step ahead of your competitors. Imagine overhauling your business model to be more flexible for your customers and ultimately meet their needs more acutely. What changes can you make in your business if you fully embrace change and don’t stick to the status quo?

1. Can you change your pricing structure and make a move to a subscription model?
2. Is your business model stuck in the past? Can any part of it be automated? Outsourced?
3. Can you add a new service to become a one-stop shop for your customers?
4. Can you expand to focus on new states or even new countries?

Don’t be afraid to get creative with your financial strategy and business model. Change is ultimately innovation and innovation ensures we thrive, improve, and remain competitive in our respective industries.

Bonus Financial Strategy Support!

Since we believe so strongly in sound financial planning and want to make sure startups can survive the challenges COVID-19 is presenting, the first 500 savvy entrepreneurs to sign up here will receive access to our cash management course for free. You’ll learn to build your very own financial model (a rolling 90 day forecast) in support of your specific business goals.

About Lorne Noble

Lorne loves finance so you don’t have to. He spent 12 years in corporate London as an investment analyst then made the jump to Boulder, Colorado to act as finance mentor to high impact companies which led him to establishing Simple Startup. Simple Startup helps entrepreneurs simplify their finances, truly understand their numbers, and make smart, informed business decisions.