If your startup has celebrated its second birthday congratulations! Your business is one of the 3% of Australian startups currently reaching this milestone.
If you’re on the brink of starting a new business, adopting the following financial habits can greatly increase your chances of turning two.
Two of the three reasons for small business closures identified by the Australian Securities and Investments Commission (ASIC) are financial. Failure to understand and manage cash flow and poor record keeping head ASIC’s list along with the lack of a well-designed business plan.
If you’re considering starting a new business venture, the first step is to establish that your product or a service solves a sufficiently large problem to attract a viable customer base. Now you’ve got that sorted, these three healthy financial habits will help you build strong foundations.
Start lean and stay lean
Aim to start with cash reserves for 6 months to a year. Commit to keeping your expenses low and paying in cash rather using credit. Consider bootstrap funding to lower your borrowing risks and keep control of your fledgling enterprise. Staying ‘liquid’ and accumulating cash reserves gives you flexibility and security when opportunities or challenges arise.
Minimise your overheads
Sticking with ‘lean thinking’ makes this much easier. Whenever you’re considering buying or leasing anything ask yourself
‘Will this spending generate actual revenue?’
This is a useful hedge against impulse spending. Your answer should tell you whether or not the return on investment (ROI) for your sought after purchase justifies the expense.
Apply the ROI test when you’re thinking about workspace. Do you need an impressive office or any office at all? If working at home doesn’t ‘work’ for you, perhaps a shared co-working space could be a professionally stimulating, low cost alternative.
Even when you win your first customers and make your initial sales, be careful about conserving your cash position until funds really start to flow.
Wait as long as you can before increasing your overheads.
Keep excellent records
Invest in bookkeeping software so you can track and manage your budgets, cash flow and expenses. This doesn’t have to be expensive as this review of 10 popular cloud based systems shows. Book keeping software minimises the time it takes you and your accountant to produce the records you need for tax purposes or potential investors.
Your profit and loss statements, balance sheets and cash flow help you monitor the accuracy and competiveness of your pricing and understand your margins. They also show you the ebb and flow of your income and expenditure so you can make informed financial decisions about adapting and growing your business.
As a new business owner it can be tough to find the time to set up efficient systems and track the health of your business. We understand this. Our team of business development specialists and mentors support enterprising startups to do this well, in Perth and across rural and regional WA.
If you’d like help with a ‘health check’ or advice on how to grow your startup – get in touch.