Most startups commit the mistake of neglecting their financial health, which turns out to be costly for the business. There are two reasons why startup owners must know their financial health.
Firstly, it is difficult to keep track of what is happening in your business regarding performance and outlook, and secondly, hiring a financial expert in the early stages can be costly.
Managing your cash inflows and outflows, costs, taxes, and payroll may not be something you imagined while starting the business.
However, you must keep track of all financials to have sufficient capital to run the business. This blog post will share a few reasons startups fail and how you can improve your business’s financial health.
Table of Content
What is the financial health of a startup?
The financial health of a startup is the ability of your early-stage business to generate and maintain a positive cash flow. One of the easiest ways to assess your financial health is through your financial statements.
These are mainly your cash flow and income statements and your balance sheet. Moreover, you can also use financial ratio analysis to determine and analyse your overall business financial health.
Achieving sound financial health for startups may not be easy, but it is essential for ensuring long-term success. Therefore, you must have a good financial strategy in place since the first day of your startup.
That will help you manage cash flow, develop a budget, and plan business growth. Proper financial health can further assist you in forecasting your future, capital expenditure versus revenue or operating expenses, attracting funding and financing, etc.
What are the key reasons startups fail?
Most startups face high risk and uncertainty mainly because of financial issues. You can’t afford to run the business if you don’t have sufficient capital.
Listed below are a few reasons why startups in the UK fail.
1. Poor cash management
Cash management in startups is the most challenging and equally crucial for business survival. It is like the oxygen of your startup, and a little mistake can put you in danger. Startups often lose track of their cash-ins and outs, leading to unorganised expenses and harming your company finances.
Your papers may show the business is profitable, but if your cash outflows exceed inflows, you will run out of cash to cover your day-to-day business expenses.
2. Lack of proper financial support
Startups suffer from financial crises during their early stages, and gaining financial support at this point is difficult. Most investors or lenders prefer investing in a business that promises high returns and is less risky, whereas startups are the opposite.
Not getting positive cash flow in the company is a significant reason for shutting down startups in the UK.
3. Relying on DIY accounting
If you have a financial burden, the first thing that comes to mind is trying DIY hacks. But this doesn’t work with accounting and can result in unforeseen mistakes.
For example, if you don’t know the accounting standards in your country, would you be able to meet them? This can create legal issues or incur costly penalties for your company.
4. Inaccuracies in record keeping and financial statements
Record-keeping is hard to squeeze for startup owners focused on business growth and product development. If you aren’t keeping your financial records correctly, your financial statements will also have errors.
This, in turn, results in making wrong decisions, failing to attract potential investors, having audit and tax issues, and legal matters.
5. Difficulty in budgeting, forecasting, and business planning
Startups, especially in their early stages, lack proper financial data. This makes budgeting, forecasting, and planning for business growth difficult. Inaccurate forecasting and lack of the appropriate budget may escalate your business expenses, leaving you penniless.
You can build the best financial models for startups without adequate financial records or hire top accountants and use forecasting software.
6. Tax complexities
Understanding your tax liabilities from the initial years of business may not be easy. Moreover, tax laws keep changing, making tax codes challenging to understand. Preparing and submitting tax returns before deadlines can be a hurdle for your business, but without proper tax filing, you may welcome unwanted costly penalties.
Furthermore, startups look for ways to reduce their tax liabilities, often leading them to the wrong ways. However, with sound knowledge and understanding, you can find legal ways where HRMC offers tax deductions to businesses for specific purposes.
7. Mishandling payroll and employee benefits
Startups often lose talents due to mishandling of employee payroll. To survive today’s competition, you must stay on top of payroll, and employee benefits are more critical than paying salaries on time.
You must contribute evenly to employee benefits packages, tax contributions, bonuses, commissions, etc. This prevents employees from being unsatisfied with your company and leaves you in between.
How do you stop financial troubles from getting into your startup?
Every business must have financial goals to ensure survival in the first evolving business scenario. Some of your financial objectives can be to raise sufficient money to get your business off the ground, hit key milestones, or become profitable.
To avoid financial troubles from dragging your startup into failure, you can do the following:
● Keep track of your cash flow
Your startup can encounter multiple types of expenses, and it is essential to understand where your money is going. You can use a simple spreadsheet or accounting software to track cash flow. It will help you identify areas where to cut costs and avoid overspending.
● Prioritise debts
When paying off your business debts, always start with the one with higher interest rates. Otherwise, they will keep increasing yearly and harm your business finances in the long run.
● Eliminate unnecessary spendings
Startups often fail to create budgets, which leads to unnecessary spending. You need to track where your money is going and find ways to reduce these costs. Additionally, you can learn tax-free business expenses to refund a part of them on your tax return.
● Ask for external investment
Though it is difficult for startups to get investments, if your business produces innovative products and services, you can attract them. They not only invest in your company but can offer necessary advice and mentorship for business growth.
Conclusion
It is essential for startups to look for ways to grow their business. But in this process, you can not neglect your financial health as it may put you in unwanted conditions.
At worst, you may need to shut down your business or pay costly penalties. However, hiring a financial expert can help your startup survive the competition from its early stages.
