At The Startup CFO, we pride ourselves in providing expert guidance and solutions for all startup financial needs. In this post, we are going to take you through the most common financial pains experienced by early-stage startups and how to avoid them. From the outset, it’s vital that we highlight the importance of having control of all of your startup’s metrics and maintaining a firm focus on the medium to long-term plan. More about that later but first, let’s get straight to number one.
Lack of control over unit economics of the startup
The key here is in the name. In order to understand what unit economics are, you must first identify one unit. In SaaS environments such as e-commerce and apps, a unit generally refers to one software user or subscriber for your service. If we think about this in terms of brick-and-mortar (physical) businesses, one physical customer would represent a unit. To calculate unit economics, you need to bear two key questions in mind:
- How much does the business spend to acquire the unit?
- How much revenue does the unit generate for the business?
These questions are essential to make sure you get a handle on how much money each unit is making you in real terms and how much you’re spending on each customer. While we would like to think about future plans and this is in fact encouraged, a business needs to be economically viable from day one and make money while attracting and growing its customer base.
Some key metrics
It’s extremely important to take into account some key metrics, as CAC (Customer acquisition cost) and LTV (Customer lifetime value) when looking at the value of your units. The former is the key associated cost and involves all the costs you need to factor in with the acquisition of each customer, while the latter describes the total gross revenue generated by every unit since the business started. Depending on the type of business you’re growing, the calculation of LTV comprises a number of factors including Customer retention rate or Churn rate, Number of purchases per month, and Average cost of each purchase.
Remember that in many SaaS environments, the purchase concept could be substituted with a subscription occasion or a new user.
By taking a unit economics approach to your startup from the beginning, you’re much more likely to have a realistic idea of the company’s health and a quantitative overview of how things are running. Remember, your business needs to be making money.
Not estimating future costs: lack of long-term vision
The COVID-19 pandemic has taught us that the unexpected can happen and we need to be prepared. Emergencies can happen and we don’t always know exactly what direction our business, market, or country is going to take at any given moment.
Medium to long-term vision is essential and should always form part of your business plan. It’s often tempting to enjoy the moment and become overwhelmed by exciting successes and growth. However, as well as focusing on current business health it’s crucial to look towards the future and have funds set aside for a range of possible scenarios.
Considering how easy it is for the money to simply run out, we should constantly be scanning for ways to maximise profitability, customer retention and savings. We can also boost savings through the implementation of a streamlining-focused mindset.
Lack of control over everyday costs: careless spending
Thinking that massive hiring is equivalent to rapid growth can prove to be an issue here. Hiring a larger team before you’ve got a wider overview of a medium to long-term set of goals can prove a heavy commitment which could lead to problems further down the line. It’s also important to make streamlining a priority, ensuring that you optimise even the most basic operational expenses or utilities in order to have better control over your cash flow.
Inconsistent cash flow
Consistent cash flow is fundamental. A business needs cash in hand in order to deal with daily expenses and provide funds for the company to fall back on. It’s often the case that a single difficult month can hugely impact on company cash flow which can then result in a domino-type effect that can last much longer than desired.
There are a number of ways in which you can try to control cash flow better and even ensure that cash flow works in your favour. These include:
●Preparing and maintaining a cash flow forecast
●Establishing clear payment terms
●Invoicing as efficiently as you can
●Optimizing payment methods
●Looking ahead and staying focused on a long-term vision
●Seeking external help for CFO services, such as the services provided by The Startup CFO
Lack of good reporting: the biggest error
It’s essential that your business is based around good reporting and tracking of expenses in order to really understand the state of your company’s health. It’s extremely important to know exactly where your money is destined, and reporting helps you achieve this amidst the chaos of busy day-to-day operations.
This is where The Startup CFO can provide our expertise. We are experts in providing outsourced CFO services to startups and use our array of professional expertise to boost your financial health and provide consultation on the most optimal reporting.
You can also join The Startup CFO Academy and learn all about finance in startups in our 12 week course, including how to make a good reporting.
You can pre-register by clicking on this link!