Failure is a very real prospect for aspiring entrepreneurs or business founders, with 80% of startups going under within 18 months of launching. A lack of comprehensive financial understanding is a major contributor to this statistic, affecting the most capable of entrepreneurs.
Even business-minded celebrities with access to the best support have had ventures crash and burn because of insufficient financial understanding of their product, from the infamous Kardashian Kard that was removed from the market after one month, to Curt Schilling’s disastrous 38 Studios that ended up defaulting on a $75 million loan.
Successful startups make sure to incorporate good financial management into their business strategies from the start, as turning a profit is what will ultimately determine their survival rather than footfall or being on trend.
Keeping Track of Cash Flow From Operations
In the rush of securing loans and managing investments, founders of startups often neglect monitoring their cash flow from operations. Also known as net cash from operating activities and other similar terms, this record of cash flow tracks the cash that enters and exits the business from daily operational activities.
Because this record excludes income and expenditure from loans and investments, it provides a rich source of data to provide a clear picture of a startup’s viability. As such, it can be crucial for identifying and addressing problems early to build a business that’s as successful as possible.
Importance of Accounting for a Cash Cushion
Plenty of startups manage to generate investments and market interest in their early days. However, many find themselves out of revenue when they fail to prepare for unexpected setbacks by setting aside emergency funds to fall back on.
Left-field problems are all but inevitable in any business, new or old, but new startups should know their financial options and make room for a cash cushion in their budgets to have the best chance of getting off the ground.
The Tax System Isn’t the Enemy
Take a close look at the financial operations of any well-established business and it will be clear that they use the tax system to their advantage. This doesn’t just apply to savvy tax avoidance; successful companies apply the intricacies of the tax system to all aspects of their business to maximize deductions and tax credits they’re eligible for. Utilizing the system in this way can also help with planning future budgets and keep the business ahead of its expenses.
Not every entrepreneur with a million, or billion, dollar idea has a background in finance, and the focus society puts on trends and engagement statistics can result in new startups neglecting basic financial habits. Yet, lack of financial acumen is frequently a major factor in failed businesses.
Consequently, it’s essential that promising startups embrace practices such as monitoring operational cash flow, planning for a cash cushion to fall back on, and learning how to make the tax system work for the company’s benefit.
Video – Startup
Some multibillion-dollar companies are startups. Airbnb is today America’s most valuable startup company (worth over $31 billion). What exactly does the term startup mean? This Market Business News (MBN) video explains.