The concept of "financial wellness" – also known as "financial well-being" – is typically discussed in the context of personal finance. The Consumer Financial Protection Bureau defines it as "a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow them to enjoy life." The same concept can be applied to businesses, however – including to startups.
One major difference between households and established businesses is that they don't necessarily have to be cash-flow positive. As any experienced founder or VC knows, it is often more important to reach key growth milestones needed to close the next round of funding than to become profitable, particularly at early stages.
While the need for startups to "burn cash" seems at odds with the state of financial wellness, they are not fundamentally incompatible. If anything, since it's not news that the fundraising environment has become significantly more challenging over the past year, and particularly over the last six months, achieving financial wellness is more important for venture-funded startups than it ever has been.
Defining financial wellness for startups
Making the definition of financial wellness applicable to startups is simpler than it seems as being able to meet current and ongoing obligations is critical for a business to continue to operate. As such, aside from replacing the word person, only the end of the phrase "able to make choices that allow them to enjoy life" need to be changed. One applicable modification is "able to make business decisions to better serve their customers and reach its growth milestones."
A startup could say to have achieved financial wellness if it has the following:
- Budget for supporting existing customers, sales and marketing efforts to acquire new customers, and investments in its product or service to improve it.
- The resources to make strategic purchases like an acquisition or a major hire when the right opportunity arises without impacting your remaining runway or overall business plan.
Three Tips for Achieving and Maintaining Financial Wellness
Manage Fixed Costs
Don't add new fixed costs unless absolutely necessary. These include employee compensation, office leases, vendor contracts, and software subscriptions – anything you are obligated to pay regularly that may be hard to get out of.
When times are good, it's easy to justify investing in new tools, setting up a fancy office, and hiring more employees. However, once established, these costs can be hard to shed. Software tools often come with one-year up-front contacts and can be hard to remove from the day-to-day workflow once established. Office leases can lock in multi-year costs that will cost additional capital to get out of, and layoffs extra a significant cost on top of any severance that will need to be paid out to departing employees in the form of damaged morale among those remaining and lost productivity from ensuing workflow adjustments.
When hiring a new employee or buying a new tool, consider whether that person or that piece of software is a “must-have” or a “nice-to-have.” With headcount in particular, startups sometimes make the mistake of hiring for expected growth instead of hiring to fill an existing need, which can result in an unpleasant outcome for both sides down the line.
Re-Evaluate One-Off Expenses
Just as a family may hold off on major one-off expenses such as a vacation when financial challenges are looming, startups should do the same if they're unsure when the next funding round will come through. While there will always be expenses that fall into the “the air conditioner broke and has to be replaced” category of necessity and complete austerity is often counterproductive, it's worth critically evaluating all major one-off expenses to maintain a comfortable cash cushion.
Luxuries such as high-end office furniture or expensive team retreats are the sort of expenses to reconsider and hold off on until that next funding round comes in if your runway is not comfortably long.
Keep a Close Eye on Employee Spending
Aside from controlling fixed costs, it's also important to keep variable costs in check. Some, like marketing expenditures, are easy to stay on top of. Costs like employee expenses, however, may be more challenging, particularly if you're relying on a reimbursement process.
While in most cases, a one-time reimbursement request will not be significant, some expenditures your employees may carry on their own credit card that could be big enough to affect your remaining runway, such as a trade show fee or travel costs for multiple team members.
To stay on top of employee spending and keep it from shortening your runway, it is important to create a detailed spending policy and implement a spend management program. Your spending policy will inform employees what is considered acceptable spending and what isn't – and make it easy for you to take action in case of non-compliance – while spend management will keep you from getting caught off guard and, if you're using the right tools, even prevent out-of-policy expenditures from happening in the first place.
Get Closer to Achieving Financial Wellness for Your Startup With Torpago
While we can't help you keep headcount under control or prevent your marketing spend from running amuck, our platform does make it easy to keep employee expenditures in check.
With Torpago, teams get access to a low-cost, rewards-enabled business credit card with support for unlimited virtual cards backed by robust spend management functionality that makes it easy to set spending limits for specific vendors, expense categories, and more. We also include reimbursement processing, so you won’t have to spend extra on a separate platform to manage those requests.
Request a demo of the Torpago platform today to learn more about how we can help your startup achieve financial wellness and navigate today's turbulent financial conditions on the way to your next round!
