Financial management for startups can be an uphill task for many; especially those who have no background in finance.

This is one of the reasons why small businesses fail. Many founders have no background in finance and they are unable to hire finance experts to help them in that.

Proper financial management is one of the crucial success factors for business growth. If you can effectively manage finances, you can have much left to grow your business.

These tips will help you better manage your business finances:

1. Avoid debt financing in the startup phase

Debt, especially from a financial institution, is not the best way of financing a business in the startup phase.

The startup phase is the initial phase of a business before it is able to make substantial revenues. This phase is characterized by losses and high capital investment demand.

At this stage, your business model is still not proven. Your skills are also being tested. It is not yet clear whether you have what it takes to grow the business. It is unclear whether you will succeed or not.

In this uncertainty and loss making phase, getting financing from a financial institution is not advisable.

This is because banks do not care whether you are making losses or not; you have to repay their money as per the debt agreement.

Debt financing should only be used when the business model has been tested and the business is making enough revenue to cover costs.

However, you can borrow from your friends and family during the startup phase. This kind of financing is flexible and will mostly not come with interest demands.

2. Increase your revenues

Every business needs to have a healthy positive cash flow. Increasing revenue is the best way of financing your business.

You increase revenues by increasing sales. If you are not selling, you will run out of business. This is why every founder should have sales and marketing skills.

You need to invest in a good product. This is the basis of making sales. If your product solves a need in the market, it will be much easier to sell it.

Do not just imitate a competitor’s product; add creativity and innovation to the idea. This will differentiate your product in the market.

Another way to increase sales is to invest in a good distribution channel. You need to make sure that your products are accessible to everyone in your target market.

You can partner with a chain store in this. No matter how good your product is, people will buy from your competitors if the cannot get it in their nearest mall.

The next thing is to invest in a good sales team. The sales team will be responsible for pushing your products to the people at their convenience.

They will help do one on one marketing that will benefit the positioning of your product in the mind of the customer.

3. Start a fixed income project

Every business needs fixed income for day to day operations. The best way to get this is to invest in a fixed income project. This project will become a cash cow for your business.

You can build a rental apartment that will give you money every month. You can then use the rental income to finance business operations while plowing back the profits.

This will relieve you of short term financial pressure and allow you to focus on the long term. You will not have to worry about paying your employee or paying office rent because the fixed income will cover those expenses.

4. Keep your costs low (Less than 50% of revenues)

This is a strategy that is used by every successful business. It has become extremely prominent as people focus on lean businesses and efficiency in work processes.

Cost management begins by identifying excesses in your business and eliminating them. You may have excess employees who are increasing your salary expense. It can be office excesses that are increasing your rent expense.

You need to identify what you do not need in your business and do away with it.

After eliminating the excesses, focus on keeping your costs low. If something is not necessary, do not do it. You can have certain tasks done by existing employees. You can also train yourself to do certain tasks instead of hiring another employee.

Your cost should not be more than 50% of your revenue. This leaves you with a 50% plus profit margin. This is a healthy balance in order to effectively invest in the growth of your business.

5. Plow back at least 80% of your profits back to the business.

As we pointed out, the best way to finance business growth is using your profits. It is better than debt and equity financing by far.

Always make sure that 80% of your profit is invested back to grow the business.

This means that your drawings should be less than 20% of the profits. Reduce your dividends payouts rates for your partners, cofounders and shareholders.

This will ensure that business growth is well funded.

6. Invest at least 10% of profits in marketing

Many founders make a mistake of not investing enough money in marketing. They are so obsessed with production and forget to push the products into the market through marketing.

A healthy growing business should invest a minimum of 10% of profits in marketing. This is both traditional and digital marketing.

You should have the right mix of both forms of marketing. While as digital marketing is cheaper, other forms of marketing will also prove to be invaluable to your business.

7. Keep accurate financial statements

I cannot emphasize the need for good book keeping for any business. Financial statements are extremely invaluable for businesses.

Even if you do not have anything else, it is good to have an accurate balance sheet and a statement of finance position (Income statement).

As you grow, you can focus on other financial statements. You do not have to hire an accountant to do this. You can learn how to draw these financial statements within an hour. Thanks to the internet.

You can also take a short course in accounting and book keeping. This will help you learn how to analyze the data in the financial statements. These data will help you in making financial decisions for your business.

Conclusion

Prudent financial management will help scale your business and make you successful in this competitive business world. This is supposed to be an area of focus for every startup founder.

Always remember this; it is not about how much money you make but how much you keep and multiply.