Top 6 financial mistakes for early-, mid- and late-stage startups
by Michael Burdick, on Feb 18, 2017
You're a startup founder. Your to-do list is neverending: hiring, culture, sales, marketing, product develpment, fundraising... it goes on and on. With everything on your mind, founders oftentimes don't spend enough time thinking about their finances. Those startup leaders who understand (and avoid) specific financial pitfalls across the three stages of their company’s life--early, mid and late--are positioned to win. So, take note. Here are the big mistakes to avoid across each of the three stages of your startup.
Inaccurate projections. “Financial projections are tough for early-stage startups,” said Burdick. “Usually, a founder sticks a finger in the wind and says, ‘Ok, that’s the number we’ll target.’ That estimate is never even close to accurate.” They create basic financial models that don’t account for key drivers and assumptions. Burdick recommends working with a financial advisor to create a model that incorporates these drivers. In addition to being a business necessity, the exercise empowers you to make smarter financial decisions and understand the most important KPI levers of the business.
Forgetting what matters financially. Early-stage startup founders are pulled in countless directions: sales, marketing, product development. That forces financial checks and balances to the back burner. Burdick cautions leaders not to lose sight of cash flow, burn and runway. (Quick tutorial: You have $1 million in the bank, and you burn $100,000 per month. This means you have a negative monthly cash flow of $100,000 and 10 months of runway left.) If you don’t stay on top of this, you can expect your company’s financial health to suffer at best. At worst, you may see everything you’ve built slip away.
Neglecting the underlying data. Your books are the bedrock of your business. Startups that engage talent to manage their books with this in mind have a leg up: They can analyze gaps between actual versus projected performance, adjusting projections accordingly. “Too many mid-stage startups don’t maintain the proper foundational financial data to create these projections,” said Burdick.
Inadequate prep for detailed KPI analysis. It’s common for mid-stage startups to identify important KPIs, then fail to capture data required to meet those complex metrics. Consider customer lifetime value (LV) and customer acquisition cost (CAC) by way of example. Too few companies put in place a bookkeeping process that itemizes the many costs that go into acquiring customers, including Facebook spend, sales salaries and the cost of content creation or direct mail. Gather that itemized information so your financial analyst can calculate the real cost of acquiring new customers on a per channel basis.
Failure to evolve KPIs. Your company has grown. So why would you allow your KPIs to remain stagnant? If they haven’t changed since you first defined them, it’s time to shake things up. For instance, if you started by measuring CAC overall, you now need more detail. What’s the cost of acquiring customers from sales versus from advertising, for instance, or social media versus direct mail? Your financial analyst needs this to determine your highest ROI channels so you can reallocate funds and acquire customers more efficiently.
Not understanding all financing options. Startups are unique. But that does not mean they can’t learn from traditional companies. “Often, founders limit themselves by focusing solely on raising VC money,” says Burdick. “In fact, there’s a world of financial vehicles — frequently used by traditional companies —available to help startups grow.” That includes debt financing, lines of credit, crowdsourcing and convertible notes, to name a few. Work with a financial expert to understand when and how to leverage these.
This blog was contributed to Paro by Tiffany Meyers at Built In Chicago. Built In is a network that allows people to get connected to local startup communities in Austin, Chicago, Colorado, and Los Angeles.