Financial matters often take a backseat in the bustling startup ecosystem as entrepreneurs focus on innovation, product development, and market expansion. Neglecting finances can lead to significant challenges down the line, including the potential failure of the business. For venture-funded startups, understanding the financial landscape is critical for success.
We recently discussed how the personal finance concept of "financial wellness" applies to venture-backed startups, but there's another concept startup founders and leaders need to be aware of that will help them make better financial decisions and manage financial risk: financial awareness.
What is Financial Awareness?
Financial awareness refers to a comprehensive understanding of the financial aspects of a business. This includes knowledge about cash flows, revenue streams, expenditures, financial risks, investments, and more. It's about knowing where your money is coming from, where it's going, and how to manage it effectively.
For startups, financial awareness extends to understanding the implications of venture capital funding, managing investor relations, and aligning financial strategy with business objectives.
Why is Financial Awareness Important for Venture-Funded Startups?
Venture-funded startups have unique financial considerations, making it even more important for them to stay aware of their financial situation than for established businesses. Here are a few reasons why:
- Budgeting and Cash Flow Management: Startups are infamous for burning through cash, especially when revenue is limited or non-existent in the early stages. With an influx of venture capital after a successful fundraising effort, it can be easy to lose budgetary discipline. Being financially aware helps strategically allocate of funds, ensuring that money is spent where it's most needed at a planned-for pace, thereby preventing unnecessary cash burn.
- Investor Relations: Investors are interested in seeing their capital put to good use. They need regular, detailed financial updates. A startup with a solid grasp of its financials can provide these updates accurately and consistently, building trust with investors.
- Risk Management: Every business venture comes with its share of financial risks. These can be minimized with a strong understanding of financial principles. For example, being aware of market trends can help a startup anticipate and prepare for potential downturns.
- Future Funding: A startup that demonstrates financial awareness is more likely to secure additional funding in the future. This is because it exhibits responsible financial management and a higher likelihood of returning a profit.
How Can Startups Improve Their Financial Awareness?
While becoming more financially aware might seem like a daunting task given the day-to-day needs of a startup, there are several actions that founders can take that will help them get started. Here are some suggestions:
- Get Informed: Founders don't need to be financial experts, but it is important to understand the key elements of business finances to make informed financial decisions, such as creating a spending plan or determining which term sheet has more favorable investment terms. The time invested in developing this knowledge, much of which is available online, will quickly pay for itself.
- Hire Expertise: Managing business finances is complex, and while founders are often focused on increasing engineering headcount, it's important to get an experienced financial leader on board early. Ideally, hire a CFO with startup experience that understands the particular financial challenges of the space. In earlier stages, a fractional CFO or experienced consultant may be enough. They'll be able to recommend the tools and build the processes needed to track and manage finances effectively and efficiently.
- Leverage Technology: If retaining an experienced financial leader is not possible, there are many financial management tools available today that can provide insights into your business' financial situation, from basic accounting tools such as Quickbooks to powerful ERPs such as Netsuite and Acumatica. These tools can help you track expenses, forecast revenue, and analyze financial trends.
- Regular Reviews: Staying financially aware is only possible with regular reviews of your books and overall financial situation. Make it a habit to review your financials regularly. Investors typically demand quarterly financial reports anyway, so even if you're otherwise pressed for time, preparing that investor presentation will be a good opportunity to review your financials thoroughly. However, reviewing them more frequently is preferable as if there are issues, you want to avoid uncovering them right before talking to your investors. If you hire a financial leader, make sure to meet with them regularly to stay informed about the financial situation instead of waiting until the quarterly review.
Maintaining financial awareness in a fast-paced, high-pressure startup environment can be challenging. However, it's a time and effort investment that pays off in the long run. Understanding and effectively managing your financials can steer your startup towards finding product-market fit and eventual profitability (or a lucrative exit).
Stay Financially Aware With Torpago's Spend Management Tools
While many costs within a business are fixed and easy to stay on top of, one area where costs are variable is employee expenses. These require extra attention to avoid unexpected expenditures that impact your budget.
Torpago makes staying on top of employee expenses easy by unifying business credit card management, reimbursement processing, and spend management in one easy-to-use platform. With Torpago, financial teams can quickly and easily issue physical and virtual cards, set spend limits, and view spending history.
And with integrations for over 1,000 HRIS, accounting, banking, & productivity applications, Torpago easily plugs into your existing financial tech stack. Request a demo today to learn more about how we can help your startup stay financially aware and get the most out of your capital!
