01 May How to Handle Your Startup Finances Like a Pro
Managing your startup finances and keeping a strong financial infrastructure for your business is one of the biggest challenges you will face as a startup founder and small-scale business owner. According to research, one of the most common reasons startups fail is that they mismanaged their funds.
This is why we were super excited to host Toro Orero, Managing Partner of the Silicon Valley-based VC fund, DraperDarkFlow, and Rebecca Enonchong, Founder of AppsTech and Founding Board Member of the African Business Angel Network (ABAN) and VC4Africa, at the April edition of #SFANLiveChat. Our goal was to explore how founders can manage and grow their startup finances.
Here’re lessons we learned about fundraising, bookkeeping, taxation, and founder’s remuneration.
The best place to raise money is your customers.
“Of those who submit business plans to venture capital investors, less than one percent will get the money they seek.” — HUFFPOST.
When you haven’t validated your concept at the early stages of your business, it’ll be tough to get lenders or venture capitalists’ attention. The traditional startup finance belief, you ask a loved one for loans to help you prove your idea and develop a route to market before sending any pitch deck to an investor. “When you have some traction (users, revenue) and are ready to scale,” Rebecca says, “that’s the ideal time to look for external funding.”
However, Toro argues that the right time for fundraising is never! Instead, he says, startup founders should focus on turning their ideas into a business, i.e., doing something somebody will pay for. “It’s a tripod stand of beliefs starting with you as the startup, then the market, then the investor — in that order.”
Depending on what your business model is, this can be a great approach to growing your business. Companies that have utilized this formula include Airbnb, Banana Republic, Dell, etc.
Hire an accountant from day one or assume that role with discipline
“The first mistake Startups often make when doing their books is not doing any — until it’s too late.” — Tim Haggard of My Bookkeeping Online.
The majority of startups do not have any form of financial records for their business transactions.
No time — the work piles up until the thought of attending to it are mental torture in itself.
It’s expensive to hire a professional accountant.
It’s not necessary since they’re not accounting for anyone yet.
“As entrepreneurs, we neglect the back office. We need to get our finances in order from the beginning,” Rebecca says: “You should be obsessive about your bottom line. Join a co-working space/incubator that offers an accountant, or you could get together with other entrepreneurs and share one accountant.”
Toro says that at the early stages of your startup, assume that all your personal finances now belong to your company, then work for your company and pay yourself nothing. But track everything! “Have a financial analytics tool, just the way you have a back-end dashboard for your website/app.”
If you can’t afford specialist accounting software, there are free software and apps like WaveApps that give you great convenience in keeping your books and tracking your cash flow. At the very least, you can use excel as it does the sums for you and is pretty easy to manipulate.As entrepreneurs, we neglect the back office. We need to get our finances in order from the beginning. Click To Tweet
On avoiding over taxation:
Focus on getting positive revenue first
Numerous businesses overpay their taxes every year by overlooking various tax deductions — Michael Raanan.
Taxation has become a burden for most businesses. But don’t think about it. “That’s overthinking and premature. Get revenue positive first, and then worry about that later. When you get revenue positive, get advice — you may need to reincorporate offshore into a developed market or even stay local. Reincorporate offshore and let your local operational entity be a wholly-owned subsidiary of your offshore entity,” Toro advice.
For those considering offshore incorporation, Stripe Atlas is a product that promises to help you incorporate your company in the U.S – with a U.S registered bank account, top tax/legal guidance from top American firms, and a free Stripe account for receiving and making payments world over. They’ve partnered with numerous startup accelerators and hubs around Africa to ease their acquisition efforts and be an option for you if you’re looking to incorporate offshore.
“Keep track of all your expenses, even transportation. It all adds up,” Rebecca cautions.
On founder remuneration:
Pay yourself last, if at all.
“When it comes to paying yourself, there needs to be a fluidity to compensation.” — Ryan Holmes, founder and CEO of Hootsuite Media Inc.
Founder compensation has been a subject of much debate over the years. “Pay yourself last and pay yourself least. Save salaries for the most talented folks you can find,” Rebecca says.
To give your baby a chance at life, you have to be willing to live a few years of your life like most people won’t in order to live the rest of your life in a manner that most people can’t.
“I’d also add that if your company is not making great profit margins yet, you have no business paying yourself,” Toro buttresses.
As Jay Samit, author of the book Disrupt Yourself, puts it, “you are getting more than cash compensation from your startup. You are getting to pursue your dream, test your mettle, have creative autonomy, and retain a sizable portion of equity. Your lifestyle should be frugal and as bootstrapped as your startup.”
Bonus point: We asked Toro and Rebecca what they look for in companies they invest in.
Rebecca: It’s all about the entrepreneur. I want to see that grit, that fire, that determination to succeed no matter what.
Toro: I look for rocket ships, not parked cars. A parked car needs me to take off; a rocket ship will take off regardless of my investment.
In the final analysis, it’s all about the money.
The biggest financial mistake startups make is in thinking sales are the same as cash. “Cash flow is everything,” Rebecca says.
At certain times in the business, you’d be forced to lower your business costs. To avoid hampering customer experience, Toro recommends that:
1. You fire those five average staff and keep that one outstanding one
2. You promise your customer just one thing but do it EPICALLY.
Always remember that money is the lifeblood of a company. If you don’t have money, YOU ARE DEAD. So stay alive!
Tom-Chris Emewulu is the Founder & President of SFAN (Stars From All Nations). When he’s not building SFAN and helping entrepreneurs and rising professionals create fulfilling careers, he’s telling African innovation stories or advocating for people-centered policy. Tom-Chris is a former consultant at Mastercard Foundation, Seedstars Ambassador for Ghana, and the author of the forthcoming book: Breaking the Limits. He is a thought leader on youth development, social entrepreneurship, technological innovation, and the future of work.