For startups, the early stages of a business are very unpredictable. They face unique financial challenges when striving to establish their foothold in the market, such as keeping the cash flow going or figuring out the tricky details of equity-based compensation for their teams. This article delves into these challenges in more detail and explores strategies to tackle them. Some of the financial hurdles that startups face are:
1. Lack of Financial Expertise
Many startups do not have the dedicated financial leadership that a company needs to operate. Research showed that around 90% of small business failures are caused by internal issues, with poor financial management being a major factor. This creates huge gaps in planning and financial management. Without someone monitoring the finances, it’s easy to end up with poor budgeting, weak forecasting, and missed growth opportunities.
2. Lack of Financial Infrastructure
The financial systems need to be scalable for a growing and expanding business. A proper financial setup simplifies processes like budgeting, forecasting, and overall financial management. Some issues that come without having a proper scalable financial system in place are:
-
Increased Manual Processes:
Relying on spreadsheets and entering data by hand can slow things down and lead to mistakes.
-
Inadequate Reporting:
It’s hard to make data-driven decisions without up-to-date reporting.
-
Compliance Challenges:
Scaling without proper systems makes it harder to stay on top of financial regulations.
3. Uncertainties in Cash Flow
Around 70% of small and medium businesses have less than four months’ worth of cash saved up. Most businesses claim their biggest worries are covering everyday expenses, keeping cash flow and working capital under control. Managing this cash flow is one of the biggest headaches for small businesses, especially when it keeps fluctuating. It poses these risks to businesses:
-
Impact on Business Value:
Even a slight 1% increase in cash flow volatility can shave 15% off a company’s value. As a result, efficient cost control can reduce this volatility and maintain the company’s value.
-
Operational Issues:
An unpredictable cash flow makes it harder to cover everyday expenses, invest in growth, or meet financial commitments. That’s why optimizing working capital and keeping money moving efficiently can help run a stable business.
4. Challenges in Raising Funds and Capital
Getting funding is another big hurdle for startups and small businesses. Around 83% of entrepreneurs don’t get access to bank loans or venture capital when starting. Many founders find it challenging to understand what investors expect, prepare the correct financial documents, or put together a business case that grabs attention. This lack of funding makes it hard to manage the remaining resources.
Strategies to Overcome Financial Hurdles
To tackle these financial hurdles, startups can leverage tools like Glassjar, an accounting software (refer to: glassjar.io), to streamline financial processes. Beyond that, a few other practical strategies are:
1. Budget Planning and Forecasting
Creating accurate budgets and forecasts is one of the best ways for startups to protect themselves from any financial setbacks that they might face in their early stages of business. A budget keeps your spending in check, while forecasts give a clear picture of revenue streams and keep a check on any changing market trends.
However, when these projections are off, the impact can be huge, resulting in consequences such as wasted resources, cash flow problems, or even missed growth opportunities. All of this can throw off daily operations and slow down long-term plans.
To avoid these problems, you need to plan precisely by using past financial data, keeping track of market trends, and paying attention to real-time metrics. You can use modern budgeting tools, like planning and accounting software or analytics platforms, to make it easier. They handle the calculations accurately, highlight all useful patterns, and let you test out different scenarios so you’re prepared for market shifts.
2. Credit Management
In B2B transactions, it’s common for businesses to extend credit to their clients for building stronger relationships and keeping all the deals running smoothly. But this practice also comes with risks, as it might lead to delayed or missed payments. When customers don’t pay on time, it can throw off cash flow, making it tough for a business to cover everyday expenses or spend money on any investment.
The best way to overcome this problem is to set up clear credit policies that lay out the terms of the credit agreement in a transparent manner, for instance, giving clear payment deadlines, and putting interest charges on overdue payments. Beyond these policies, credit management also means tracking receivables and staying on top of them. Businesses can do this by:
- Regularly track outstanding invoices.
- Follow up quickly on overdue payments.
- Use automated accounts receivable software to send reminders, generate reports, and flag high-risk accounts.
Endnote
Startups need to be aware of the challenges they face when they first start. Only when you understand the common financial hurdles, from unpredictable cash flow to difficulties in raising capital, can you plan smarter strategies, avoid costly mistakes, and make confident decisions that promise long-term growth.
Find a Home-Based Business to Start-Up >>> Hundreds of Business Listings.
