Financial management for startups: 8 steps for success

Dustin Johnson
By Dustin Johnson

The goal of a startup is to find the quickest path to profitability. Financial management for startups isn’t something you can settle on day one and then forget about. You should keep your financial game plan at the forefront of every decision your startup makes. 

We get it. In the early stages, managing your startup finances is a nitty-gritty task you’d rather not be bothered with. You may think, “I have a plan to get profitable, so I’ll just worry about finances when I get there.” 

In fast-paced startup environments, it’s not uncommon for startups to run out of cash without knowing it. This is one reason (of many) why managing startup finances is important. You already know that, so this article isn’t going just to hit you over the head. We’ll help you develop a game plan that saves you time and enables you to make better decisions.

As a startup, we know how challenging it can be to manage so many plates. Luckily for us, finance is a collective strength of ours. If that’s not the case for your startup, listen as we share a few things about managing startup finances.

Know your numbers

As a startup founder, you need to know three main numbers:

  1. The bank balance
  2. Money coming in
  3. Money going out

These numbers are so straightforward they’re almost impossible to ignore. Unfortunately, ignoring them is what too many founders do. Did you know that 82% of startups fail because of cash flow mismanagement? How many of those startups had a good offer and product market fit that lacked financial sense?

What other metrics should a startup company look at?

  • Burn Rate: How fast a startup spends cash reserves.
  • Runway: How long you have until you run out of money.
  • Growth Rate: A company's revenue increase over a certain period.
  • Churn Rate: Percentage of customers you lose in a period of time.

Start with a business bank account

Opening a business bank account is the first financial step to starting your business on the right foot. A lot of managing startup finances is biting the bullet and doing things ASAP that you can easily put off for later.

Creating a business bank account is one of those things, but here are a few reasons not to:

  • It helps you separate your personal from business finances, alleviating headaches come tax time.
  • It makes your business look more professional when your business name is on checks, invoices, and other payment methods.
  • It gives you an added layer of legal and liability protection. Judges can hold you personally liable for business debt without a business bank account.
  • It helps you establish business credit, which lenders use to determine whether or not to loan your business money.

Setup budget systems

From day one, you should leverage automated accounting systems to save time. If you plan on being profitable (what startup doesn’t), you’ll need automated accounting anyway. Starting early sets up a rhythm for when things get hectic. Startups move fast, so your budget will change as things change. An investor that said no might change their mind. You might win a big contract, or you could be hit with a surprise legal bill.

So, how often should you look at your finances?

At a minimum weekly, if not daily.

As we said, startup finances aren’t something you can set up once and then forget about. If you only check in on your finances during tax season and the end of the year, that’s not enough. It may already be too late if you only look at startup finances after a few red flags. If you only look at finances after the investors come calling, you’re shooting yourself in the foot.

Forecast your time to profitability

The break-even projection date is when you believe your business will become profitable. There’s no recommended timeframe, but modern estimates fall between years two and three. You will create a date based on current revenue and your burn rate.

This number is equal parts optimism and necessity. Ideally, you’re profitable before your business runs out of cash. You don’t want to fall into a position where you rely on emergency funding from investors, lenders, or friends. Every day, startups fail because that money never comes. In a sentence, your runway should never be shorter than your projected time to profitability.

Calculate your funding needs

Usually, startups go through 3 seed funding rounds before completing an IPO. After this, they’re either acquired or enter the public market. In your first round of funding, you should raise enough expenses to last 6-12 months. If your startup is more of a traditional business, you have many other funding options. 

Hire based on the numbers

As a founder, you’re under constant pressure to hire quickly, equal parts due to ego and business goals.

A good rule of thumb for hiring is that employees will cost about 25-50% more than their salary. So, if you pay an employee $100,000, their real cost will be around $125,000-150,000.

You should also dive deeper into why you’re hiring a new employee. Are you hiring from a position of strength or weakness? What does that even mean? Let’s look at two examples.

  1. We aren’t getting the kind of traction on social media we’d like. Therefore, we’re going to hire a social media manager.
  2. Customers are beating our doors down on social media, and I can’t keep up. Therefore, we’ll hire a social media manager.

As Gretchen from Mean Girls said, “Stop trying to make 'fetch' happen.” There are times to hire to fill an immediate need and times when you hire out of desperation to fix a problem that originates elsewhere. This is a delicate balance because if there’s one word to describe running a startup, it’s “desperation.”

Hire a bookkeeper

As your business acquires customers and funding, managing the books is no longer a good use of your time. Hiring an accounting expert will save you time and likely improve the depth of your financial reporting.

Hiring a bookkeeper is a good idea, but you must read the weekly or monthly reports. Bookkeepers aren’t magicians who will fix leaky holes or spend their time explaining what to do. Generally, they’re middlemen who relay accurate financial information. It’s still your job to spot irregularities and find the appropriate help if something doesn’t make sense.

Save for taxes

The taxes your startup pays will depend on your business structure and location. How much your business pays will depend on the previous factors, your gross profit, and other factors like staff.

One tax consideration many startups need to account for is estimated taxes. The IRS defines estimated tax as the method used to pay tax on income that is not subject to withholding. This payment usually gets made to federal and state governments (except in states with no income tax). Estimated tax is due quarterly or by the 15th of the month following quarter-end.

Manage startup finances

As a startup founder, you have a lot on your plate. It’s easy to let finances fall by the wayside, but remember that every business lives and dies by the dollar. It’s your job to gather accurate information quickly and make informed financial decisions. You can use a variety of tools, like outside experts and automated tools.

One automated tool you can use is ComplYant. When you’re a startup founder, your focus is on the future. But between juggling big ideas and chasing after your dreams, you have a business to run. Don’t put business taxes on the back burner. Unpaid tax bills, accounting errors, and missed deadlines can add up fast.

We’ll bring all your business tax needs into a single, easy-to-use dashboard. Get custom tax calendars and due date reminders, budget for future bills, and uncover savings.

Dustin Johnson
By Dustin Johnson
Dustin Johnson is a Senior Tax Research Specialist at ComplYant. Prior to joining ComplYant, he spent over eleven years performing tax research at the world’s largest tax preparation company. Dustin holds a Bachelor of Business Administration and a Juris Doctor. Outside of work, Dustin enjoys biking and spending time with his family.

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