Show Me The Money: How to Handle Your Startup Finances Like a Pro

One of the biggest challenges startup founders and small-scale business owners face is maintaining a strong financial infrastructure for their business. According to forentrepreneurs.com, one of the most common reasons startups fail is because they mismanaged the funds they had. 

This is why we were super excited to host Toro Orero, Managing Partner of the Silicon Valley-based VC fund, Draper Dark Flow, and Rebecca Enonchong, Founder of AppsTech and Founding Board Member of the African Business Angel Network (ABAN) and VC4Africa, at April edition of #SFANLiveChat.

Our goal? To explore how startup founders can manage and grow their finances. 

Here are the lessons we learned about fundraising, bookkeeping, taxation, and founder’s remuneration.

ON FUNDRAISING:

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

At the early stages of your business when you haven’t validated your concept, it’ll be incredibly challenging to get the attention of lenders or venture capitalists.

The traditional belief is that 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 probably never! Instead, he says, startup founders should focus on turning their ideas into a business. That is, 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,” he said.

That can be a great approach to growing your business depending on what your business model is. Companies that have utilized this formula include Airbnb, Banana Republic, Dell, etc.

ON BOOKKEEPING:

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.

Most startups do not have any form of financial records for their business transactions.

Why? No time. The work piles up until the thought of attending to it is a mental torture.

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.”

At the early stages of your startup, Toro said, 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 tools and apps, like WaveApps, that give you great convenience in keeping your books and tracking 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," Rebecca cautioned.

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 to 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 advised.

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 the world over. They've partnered with numerous startup accelerators and hubs around Africa to ease their acquisition efforts and can 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 cautioned.

"If your company is not making great profit margins yet, you have no business paying yourself," Toro stressed.

ON FOUNDER'S 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 like most people won’t, so you can 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 buttressed.

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 thinking sales are 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.