Financial thinking is a key aspect of surviving as a startup. Using finance to help chart a path and plan for future events can translate into a successful startup and investment.
Sailing is a good metaphor for financial thinking. The wind itself may be uncontrollable, but you can decide on a direction and then adjust the sails of your boat accordingly. By tacking back and forth with the wind, you stay flexible and are poised to take advantage of each new situation while still staying on course to achieve your goal. The numerous financial decisions entrepreneurs must make have a direct impact on the direction of their startup and, inevitably, its success.
Most startups lack sufficient resources, so considering your decisions from a financial perspective and using the right financial tools can make the difference between success and failure. Finding the right financial approach at each stage of an early-stage startup is critical for entrepreneurs. The Entrepreneur’s Toolkit provides resources on and offers insights into the critical subjects of cash flow, financial planning and strategy.
Cash flow is the lifeblood of any business, with money entering a company through certain channels and leaving through others. The fundamental idea here is to not run out of cash. Predicting your startup’s cash flow pattern—especially when the startup grows to new stages, creating greater complexities in its operation—is key to the survival of the company. For good management of the business, it’s important to understand how forecasting works with managing cash and to realize that each business decision affects the flow of cash.
There are three important financial tools entrepreneurs can use to manage cash flow: the income statement, the cash flow forecast and the balance sheet. Andrew Graham, senior director of insurance at President’s Choice Financial, explains how to use these tools in his talk on financial planning and budgeting from last season’s Entrepreneurship 101 lecture series.
Financial planning and strategy
Financial planning and strategy vary depending on the type of company you’re starting, but the basic tools are relatively similar. You’ll find them outlined in our four-part series on financing from the workbooks section in the Entrepreneur’s Toolkit.
Before developing a financial plan, entrepreneurs need to ask the right questions.
Entrepreneurs understand that financing needs to be in place in order to get their company started, but successful entrepreneurs must also generate sources of capital beyond early sales to keep going and growing. An action plan arranges the goals and resources on a timeline, a structure that is helpful for making informed decisions from a financial perspective as well as other business perspectives, such as competition and market opportunity.
In uncertain market environments—and whether you’re launching a rocket startup or bootstrapping to success—the underlying principle of any business is to manage the financial stability of the company in order to survive and stay competitive. Recognizing and responding to patterns of cash flow will reduce risk and help with making good financial decisions for the future of your company, including smartly managing the flexibility needed to take action quickly when pivoting or investment opportunities arise.
You will find an excellent overview of the fundamental concepts and tools of financial planning and strategy in the following Entrepreneur’s Toolkit resources.
Financial resources in the Entrepreneur’s Toolkit