Starting a business is not easy! There are so many variables. So much to think about, and so much to work on, that even genius ideas sometimes fail in the first year. To give you a general idea, in 2020 the failure rate of startups was 90%.
You read that right! NINETY PERCENT. That means that only 1 in 10 survive in the long run. We know that starting a new business is much more than analyzing numbers, but we HAVE to because numbers don’t lie! Research shows that the % of businesses that fail because of cash flow problems is 82%.
This is sad, and it can be scary to start after learning these facts, but we are not here to discourage you! We are here to help! So, how could we, as accountants, help your startup succeed?
We prepared a list of 5 Preventable Mistakes to help you avoid failure and achieve the success your Startup deserves.
➊ Insufficient Capital
Small business owners tend to either overestimate or underestimate their cash flows, and that’s how 30% of businesses fail. Underestimating your cash flow means that you would probably run out of cash before paying your bills. To know if you are committing this mistake we first need to understand what cash flow is.
In simple words Cash flow is the number ($) you get after subtracting ALL your expenses from your income. That does not sound complicated at all, right?
We agree! However, formulas to calculate this number can look like this:
Free Cash Flow = Net income + Depreciation – Change in Working Capital – Capital Expenditure
Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital
Cash Flow Forecast = Beginning Cash + Projected Inflows – Projected Outflows = Ending Cash
Not complicated, but tricky if you don’t have the knowledge.
Are you using any of those formulas to understand your cash flow? Do you need help to learn which one you should be using in your business? Feel free to get in touch with us and we can help you to figure that out!
➋ Poor Cash management
A cash forecast is crucial for any company! It does not matter its shape or size, and it is important to work on it at the very early stages of your startup, ideally before launching it!
Anticipating your payments and receivables is the only way to estimate your company’s future financial position. Wondering how to do that?
First, make sure to identify all fixed and variable costs! That’s crucial because knowing how much you will be spending each month (for at least the next 3 months) is the only way to understand how much you will need to make to successfully run your business.
Write down a complete list of all FIXED costs (rent, loans, insurance, advertising, utilities, etc) and all VARIABLE costs (labor, packaging, raw materials, commission, etc).
Then, work on estimating your cash inflows. That can be subjective and very variable, so dedicate time to this part of your business plan, and investigate as much as you can: scope out competitors, assess populations growth, survey potential customers, do all the research to figure out how many sales you can expect for each month and how much you can charge for your products and services.
That’s a simple overview of cash management. Get in touch us if you would like to receive a cash-flow forecast template!
➌ Poor Record Keeping & Controls
Mistake numero 3. Poor record keeping and controls. Yes, we are still talking about how to avoid the failure of a startup! Want to know why it is important to have good record-keeping? See below some pinpoints, and then what could happen if you don’t pay attention to it:
The vantages of being on top of it:
✅ Increase the likelihood of business success by monitoring the progress of your startup;
✅ Accurate information informs better decisions;
✅ Investors and banks need that accurate information;
✅ You need to track your tax obligations.
The consequences of NOT being on top of it:
❌ Trouble with collections;
❌ Late payments to suppliers;
❌ Difficulty getting bank loans;
❌ Inaccurate pricing decisions;
❌ Ineffective use of time, etc.
Questions to ask yourself to figure out if you are on a path to success:
❓How are you monitoring your company’s cash balances on a regular basis?
❓How do you manage and organize bills and invoices?
❓Do you collect sales information from multiple platforms vs. one source of truth?
We know that keeping receipts, bank statements, invoices, payroll records, and any other documentary evidence that supports an item of income, deduction, or credit shown on your tax return seems like a lot, but we hope that you understand now why this is so important (and hey! There is always QuickBooks Online, Xero, and many other softwares to make your life easier).
➍ Improper Product Pricing
We told you about cash management, cash inflows & outflows, fixed and variable costs, all of that, remember? If you paid attention to mistake #2, then pricing should be a piece of cake for you! But if after doing all that work you are still struggling to make sure your company is going to be profitable, consider the following:
❓Can you reduce any of my fixed costs? YES? By how much?
❓What about variable costs? Can you reduce some of that also?
❓How could you increase your customer lifespan?
❓How high can you raise your price before it is worth it for your customers to go elsewhere?
Keep in mind that the market is constantly changing. It is important to revisit your price strategy from time to time, to make sure you are still matching the needs of your customers, while also maintaining your profitability.
➎ Uncontrolled Growth
Last pain point (for this series) – Rapid & Uncontrolled growth. Wait, what? Are you telling me that growth is bad for my company? Are you crazy? I need to grow!
Noooo! I mean yes, but no! What I mean is that managing your growth is crucial, and uncontrolled growth is commonly a fatal mistake.
Most might think that the solution to cash flow problems is to grow faster, but in my opinion and personal experience, pressing the brakes is not always the worst option, the reason being that to grow faster you will have to spend more, but would still be relying too much on future revenue. The combination of exponential growth and basically no cash, could present lots of obstacles. Some could look like this:
🤬 Bad relationship with providers due to late payments of invoices
👎 Higher Churn rate due to limited staff to support all these new clients, resulting in poor customer service
🤬 Unhappy, overworked staff working extra hours to support new clients
👎 Extra expenses to build a retention plan ASAP
We absolutely want you to grow and succeed! But, we recommend that before going all in into your growth path, you take a deep breath and learn about these key SaaS metrics:
❗️Customer lifetime value
❗️Customer acquisition costs
❗️Churn rates
I read somewhere that ❝running a business is not a sprint, it’s a marathon. The first one doesn’t always win the race❞
If you don’t agree with that, that’s fine! Just remember that Google was not the first search engine out there, however it is very possible you don’t even remember which one was the first one, I supposed they did not win that race huh?
We at Accounting Wise want to see startups thriving. If you have questions about setting up the accounting system for your SaaS do not hesitate to contact us!
Send us an email to information@accounting-wise.com or schedule a call using this link. We would love to hear from you!