Financial Management Best Practices for Startups
Startups typically have limited resources, hence all the bootstrapping and rounds of fundraising. That makes financial diligence all the more critical for them. After all, founders and executives need to be able to make informed decisions about when and how to invest in their business, whether to pursue funding opportunities and how to manage cash flow. A clear understanding of their startup's financial situation enables them to do so.
Financial diligence also helps startups identify and address risks early, impacting the potential long-term success of the business. And given the recent crisis surrounding Silicon Valley Bank (SVB), this seemed like as good a time as any to review financial management best practices for startups.
This article provides a thorough review of financial best practices for startups, including budgeting, expense management, banking relationships, payment methods, fraud protection, and more.
Budgeting for Startups
As previously mentioned, startups are famous for being strapped for cash. It would then stand to reason that budgets are crucial to any startup’s survival and growth strategy.
Now, there’s no denying that building a budget for your startup can be daunting. There’s also no need to re-create the wheel if you can avoid it. To that end, don’t hesitate to leverage resources like budget templates that can help you get a head start. And you don’t even have to look far to find one: Download LogicBoost Lab’s free startup budget template if you need help getting a handle on your company’s finances.
More Reading: Why your startup needs a budget
Tracking Burn Rate
Burn rate (or run rate) is the pace at which startups spend capital or cash reserves. Founders need to keep an eye on that metric because it directly affects how long their company can operate before running out of money (i.e., runway).
High burn rates can quickly deplete available funds, leaving startups with limited options for raising additional capital and a shortened runway which hampers their ability to execute plans, scale the business, make strategic hires, and ultimately, reach profitability.
Monitoring your startup's burn rate helps ensure it has a sufficient runway to achieve your goals and secure long-term success. It also helps combat a decrease in valuation within the investment space. Because when money is flowing, valuations tend to inflate, and founders can become less focused on what money is going out of the business. But as valuations drop, if founders haven't been financially responsible, they can find themselves tight on cash and unable to raise more, leading to down rounds or companies going out of business. So, manage your expenses carefully.
Financial Management Best Practices
Financial management best practices for startups touches every corner of your business, from HR policy to vendor relationships and fraud protection. Getting to a point where your company has a handle on all (or most) of these items will put you in a much greater position to win.
Sweep Network for Excess Cash
Maximizing how much your company's cash earns by ensuring you don't have funds sitting idly in low-interest-bearing accounts is a great way to help get your startup on solid financial footing. With a sweep network — a financial management tool — your company's excess cash is automatically transferred at the end of each business day from a checking account to a higher-yielding investment or depository account, like a money market fund. That means your company's available cash earns more while remaining easily accessible for daily operations.
You can also use sweep networks to manage cash across multiple accounts, consolidating funds into a central account for easier management and investment. Overall, sweep networks are an effective tool for startups and other businesses to manage their finances effectively, maximize returns on their available cash, and optimize their overall financial management.
Evaluate Organizational Subscriptions and Tech Stack
Always have a clear view of the subscriptions your startup is paying for. It's all too easy to lose track of them and then be shocked when an audit takes place and finds thousands of wasted dollars each month.
Keeping track of those subscriptions and payments can be challenging for companies, especially as they grow and add tools and services to their tech stack. Here are some tips for staying on top of your software payments:
- Create a Software Inventory: This first step should include everything from cloud storage platforms to project management tools to marketing automation software.
- Assign Responsibility: Choose a specific team or individual to track software subscriptions and payments. They should maintain the software inventory and ensure all payments are made on time.
- Centralize Your Payments: Use a single company credit card or a payment management tool to pay for software subscriptions. That makes payments easier to track and ensures all subscriptions are up to date.
- Monitor Vendor Notifications: Watch for payment notifications from software vendors. Most vendors send reminders before a payment is due or for failed payments, so track those notifications and act as needed.
- Regularly Review Subscriptions: Companies can do this quarterly or bi-annually. It helps reduce costs by identifying the tools and services that are get used and prevents subscriptions from falling through the cracks.
Bank with Multiple Banks
Parking all your startup's cash with a single bank isn't following financial management best practices. Use at least two banks — one that is startup-friendly and one that has national reach — to spread out your cash reserves and other finances for unexpected moments like the SVB meltdown.
Ensure Your Accounts are Set Up for Wire Transfers
Different types of accounts come with different rules and regulations. Ensure your bank accounts accept wire transfers should you need to wire cash or receive a wire fast. Most wires can be completed within the same business day as long as the request happens within bank operating hours.
Grant Account Access to More than One Person
There are all kinds of emergency scenarios in which your company may need fast access to funds. The last thing you want in those instances is to have one person be the sole access point to your bank accounts. That bottleneck could create a domino effect where employees or vendors go unpaid. So, make sure at least a few key people have the necessary permissions and documents to help manage your startup's finances in case of an emergency.
Build a Communication Plan
In the same vein as granting bank account access to more than one person, create a communication plan to prepare your startup for the unlikely possibility of man-made or natural disasters. It doesn’t have to be exhaustive as long as it provides clear directions for various emergency types.
Inventory Payment Methods
Let's say one of your corporate cards gets canceled. Would you know right away which vendor payments would be affected? Regardless of whether human error or fraud is to blame for the cancellation, you need to know to which recurring expenses, if any, that card was attached.
Use Voice Verification for Account Changes and Wiring Instructions
Unfortunately, given how commonplace financial fraud is today, you should always check your wire instructions for accuracy. There are too many real-world examples of businesses having their wire transfers hijacked because they were provided fraudulent information by hackers. Always call the financial institution with which you are working to confirm the validity of the instructions you've received.
Use Two-Factor Authentication for Financial Services
Two-factor authentication (2FA) is a security measure that requires users to provide two forms of identification to access their accounts. Using 2FA makes it much more difficult for hackers to access your financial accounts, given the extra layer of information (e.g., a code sent to your phone, a fingerprint scan, etc.) they would need to do so.
Without 2FA, all a hacker needs is your password (something they can gain through a data breach or phishing attack) to access your account and carry out fraudulent activities, like making unauthorized transactions or changing account details.
That makes 2FA a powerful tool in preventing financial loss, protecting sensitive financial information, and giving you greater peace of mind when using online financial services.
Make a Plan to Prevent Losing Account Access
Don’t fall into the trap of thinking that losing bank account access will never happen to you. The truth is, there are several ways in which that can happen. These are some of the most common scenarios, so you know what to plan against:
- Unauthorized Access: If an unauthorized party accesses your company's bank account login credentials, they could change the login information or transfer funds out of the account, effectively locking you out.
- Bank Error: In rare cases, a bank error could result in your company losing access to its accounts. For example, a bank might incorrectly close an account due to a misunderstanding, administrative error, or failure to notify the company of a change in account status.
- Legal Action: In some cases, legal action such as a court order or government investigation could result in a company losing bank account access.
- Cybersecurity Incidents: Cyberattacks like hacking, phishing, or malware can lead to losing bank account access after the attackers change your login credentials.
- Internal Issues: Incidents like employee error, fraud, or embezzlement can also result in a company losing account access. For example, an employee might change the login credentials without authorization or misuse funds from the account, leading to account closures or restrictions.
Take steps to reduce this kind of financial risk for your startup by regularly monitoring account activity, using strong passwords and 2FA, and implementing cybersecurity best practices.
Beware of Phishing and Fraud Attacks
By now, you've probably put together that phishing and fraud attacks are a threat to your startup's financial health, but there are several steps your company can take to reduce that risk:
- Employee Education: Educating your workforce on recognizing and avoiding phishing and fraud attacks is one of the best tools in your arsenal. Startups can offer training programs on topics such as email security, password management, and how to identify phishing emails.
- Two-Factor Authorization: Reference the previous section on Two-Factor Authorization for why this is important in combatting phishing and fraud attempts.
- Anti-Malware and Anti-Virus Software: Ensure your startup has up-to-date anti-malware and anti-virus software installed on all devices that access company accounts. Taking that step can help detect and prevent malware attacks, which phishing campaigns often use.
- Email Filtering: Implement email filtering and spam detection software to prevent phishing emails from reaching your employees in the first place.
- Verification Procedures: Establish verification procedures for any changes to account details or payment instructions, like requiring a phone call or video conference to confirm the change.
- Regular Monitoring: Tracking your financial accounts for suspicious activity on a regular basis can help your startup detect fraud early and minimize the impact.
Ultimately, taking a proactive approach to your startup’s cybersecurity — from education to software implementation — is essential to protecting your firm's finances and following financial management best practices.
Putting It All Together
Most founders didn’t launch a startup because they aspired to get in the weeds of financial management best practices. But there’s no denying that being financially diligent can be just as important to the long-term success of your firm as perfecting your SaaS product or service.
So don’t hesitate to invest in the software, education, and planning that will help keep your startup’s finances healthy and secure. It's more than worth it because you can't put a price on that kind of peace of mind.