Guest author, David Fogel, in conjunction with Magnetude Consulting
Magnetude features guest blogger, David Fogel, investor and managing partner of Swifton CFOs LLC. David shares common financial mistakes that startups make and how avoid them.
Mistake #1: Waiting too Long to Talk to Investors
What to Avoid: Many startups make the mistake of waiting to talk to investors until they need funding. Asking a stranger for money won’t get you too far, and investors want to invest where they know the entrepreneur is credible, reliable, and open to guidance.
Advice: As soon as you’re able to effectively tell your story, you’re ready to start talking to investors. Investors care about establishing relationships with entrepreneurs and providing mentorship. They can help you determine the right direction for your startup and establish milestones along the way. Following up to show that you’re reaching those milestones demonstrates your credibility.
Mistake #2 Poorly Planned Cash Flow
What to Avoid: Startups that don’t plan out their cash flow at a granular enough level can find themselves in a trouble later down the road. Without proper planning for the future, a startup can easily find itself with overdue bills and unmanageable debt.
Advice: The most important part about financial cash flow planning is timing. Plan your finances weekly until your company is cash flow positive. Once you have 3+ months worth of cash, you can move your focus from weekly to monthly planning.
Mistake #3 Overly Optimistic Financial Projections
What to Avoid: Getting so excited about your startup’s products that you become too optimistic about sales, underestimate your business expenses, and never plan for contingencies. This kind of naïve optimism reduces your credibility with investors.
Advice: Recognize that there will always be unforeseeable problems. Setting financial milestones is a great way to have a realistic projection of your finances. Ask yourself: What money do we need to get through the next X months? If you plan your cash flow conservatively for the first 18 months, you will likely have a more accurate picture of your finances.
Mistake #4: Indefensible 3-5 Year Projections
What to Avoid: When putting together your 3-5 year projections for your investor, make sure you can defend your plan. Too often, when investors question the projections, entrepreneurs are unable to back up their plans with sufficient detail.
Advice: Make sure your 3-5 year projections include all of your expenses, and plan for the best case scenario. Investors won’t necessarily believe your revenue forecast, but they do want to know that it’s possible, and that possibility comes from your understanding the details behind the projections.
Mistake #5: Making Only Bottoms Up or Top Down Projections
What to Avoid: When thinking about your company’s projections, many areas that go into a successful business are missed. People, space costs, marketing, research & development – these all go into the day-to-day costs of creating and running a business.
Advice: Top down projections are important for helping to keep you in line with industry benchmarks and to ensure you’re building the company the right way. But that can’t be at the expense of bottoms up projections. Knowing what the work costs for your specific company is a crucial step. Start by creating a framework of standard costs incurred to help you to find the balance between industry costs and your own business’ needs.
Mistake #6: Poorly Planned Equity Distribution
What to Avoid: This is an often overlooked area, and many startups do not properly plan out their equity distribution. Without the right plan, you can have a misallocated distribution of the equity.
Advice: Plan your equity distribution and stock options carefully for the first two years of your startup. Provide equity for your founding team and early staff, board of directors, and advisors. Your equity will change over time, but if you have a plan from the beginning, you’ll be able to make the right changes as they come.
Mistake #7: Waiting too Long to Track Spending
What to Avoid: Planning spending is about knowing your history. If you haven’t tracked your spending from the beginning, you won’t have a great idea about what you need to spend in the future. Especially as you start making money, tracking the money you spend on your business can help you make the most of your deductions during tax season.
Advice: It’s usually fine for an emerging startup to track their spending in Excel or a program like QuickBooks. However, once it becomes too unmanageable, it’s time to bring someone in to help out. If you’re looking for investors, you’ll need to have a record of all of your expenses from the beginning, so that they can conduct proper due diligence.
Mistake #8: Making Agreements Without a Financial Advisor
What to Avoid: Without the advice from a financial advisor, business agreements can unexpectedly go awry and you’ll be left with serious consequences. Setting aside the obvious missed opportunities or unfair advantages, startups who don’t understand the financial implications can face future issues with liability or insurance.
Advice: Whether it’s customer agreements, vendor agreements, or equity decisions, there is a financial component to many business agreements, and your financial advisor should be involved—or at least aware—of all of them.
Mistake #9: Unpreparedness for Bank Loan Requests
What to Avoid: When approaching a bank for funding, just like any investor they will dig deeper into your financial projections and expect you to be well versed on your finances.
Advice: Let your financial advisor present your projections to the bank, and make sure they were at least somewhat involved in the creation of them. Bankers want to know that the financial statements have validity, and bringing an expert creates the credibility you need for bank financing.
Swifton CFOs LLC, is dedicated to your evolving business, making it affordable to have a valued financial partner focused on your profitability. Contact us at swiftoncfos.com/contact-us
Magnetude Consulting offers complimentary marketing consultations to early stage startups. To request a consultation, please contact us today.
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