We can talk about startup failure and success rates until we’re blue in the face, but that won’t change the fact that so many of them go out of business every year. And, no, I’m not referring to the “GOB SALE” posts you see from your Facebook friends in your hometown that got involved in multi-level marketing schemes. Entrepreneurs who launch their own business have guts and passion. And sometimes things line up, and the business becomes a booming success. But it’s more than just luck; there’s a strategy to having a successful business.
Through my research, there seems to be common strategies that these successful businesses employ, to keep it simple, let’s categorize them into three areas: cash flow, marketing, and security.
Stay ahead of cash flow needs
The first strategy of successful startups is: stay ahead of cash flow needs! Everyone knows that cash flow is a huge factor in any successful business. So, it should go without saying that staying ahead of cash flow needs is critical to a startup, but according to research and analytics done by CB Insights1, 29% of startups still fail because of cash flow and funding issues.
Successful startups think through all the components of their ideas, launch, and rollout. They know exactly what their upcoming cash needs are and are able to plan accordingly. Too often we see startups going after funding they don’t actually need and giving away too much of their business. Extra funding does not sound like a bad thing, but too much leaves a lot of room for errors, like making decisions without thinking through all the consequences.
Cash flow is an area that accountants, investors, and advisors are usually the most prepared to help businesses with. Many of the skills they use working with small and mid-sized businesses can be used with startups, too. Things like calculating breakeven, keeping AR/AP in check, and spotting problem areas in the books are areas startups need help with, and things advisors are familiar with.
Understanding True Break Even
A common misconception about breakeven is that it just means the monthly revenue will cover expenses. But in reality, it’s not that simple if you’re planning for long-term success. True Break Even takes into account fixed expenses, variable expenses, cash reserves for growth opportunities, and covers risk. It’s not pessimistic to plan for the worst, it’s smart strategizing. By planning for gaps, it’s easier to make it through the rough patches, and reduce the risk of closure.
Listen to the podcast or download the step-by-step calculation here.
Monitoring Aging Receivables and Payables
AR and AP are important to keep under control in all companies, but startups can be critically impacted by cash flow delays even more than other companies. Past due bills add extra, unnecessary stress, and past due invoices impact the cash flow and business operations.
Advisors are already keeping on top of this for the other businesses they help, so it is easy to translate these skills to startups.
Finding the Underlying Problems
Problems in the finances are indicators of larger, underlying problems. When a business is hurting for money, there are a few common responses that are “easy fixes” but don’t actually address the real problem. An entrepreneur, when faced with cash flow problems, may jump to a solution like:
- Firing the sales manager and/or salespeople
- Downsizing the company
- Hiring new salespeople
- Doubling sales efforts
- Reducing prices
But these are not long-term strategies, rather they are more of a knee-jerk, “shoot the messenger” reaction. Yes, cutting immediate costs will solve a short-term problem, pushing sales can create a short-term cash influx, and adding discounts to the products can make the product more competitive, all of these ideas are very near-sighted.
The underlying problem could be something deeper than just an immediate cash flow issue. Things like:
- Was the pricing and value analysis correct?
- Was the market exposure enough?
- Does the company have credibility?
- Is the market growing or static?
- Did we account for the correct adoption cycle and learning curve?
- Does the customer’s buying cycle match our forecast?
All of these assumptions can be put into strategies and scenarios to determine how business decisions and choices impact the finances. Accountants, bookkeepers, and investment companies acting as an advisor are able to help the entrepreneur smooth over their panic and get to the underlying cause of the problems, find a solution, and create a long-term solution.
Cash is king, but marketing is everything
The second strategy of successful startups is knowing that: cash is king, but marketing is everything. Without demand, even the best laid business plans will go awry.
In some ways, cash flow and marketing go hand in hand. Often, if a company hits a cashflow issue they will cut funding to things deemed not necessary, which usually includes marketing. But in reality, without marketing and top of mind awareness, there is less of a chance of recovery. An advisor has the ability to create what-if scenarios and strategies to forecast the impact of marketing campaigns and track the return on investment.
Marketing encompasses so much more than is commonly thought of. Yes, it includes advertisements and public relations, but it also controls what potential customers think of the company, how many potential customers learn about the product, and how the company communicates with their audience.
A successful business must solve a problem, entrepreneurs often see a need in the market or a pain point that isn’t being met and decide to create a solution. But simply having a solution available is not enough. Customers must be able to find this innovative product, understand what it does, weigh the cost versus benefits it provides before being willing to move forward, and feel like they are valued and treated fairly during the process.
It has become necessary to think beyond the traditional marketing practices. In today’s age of communication, networks, and reviews, the customer experience has become a major aspect in a company’s success. The customer experience includes the physical location of the business, the attitude and knowledge of the person answering the phones, how easy it is for customers to find answers on the website, how quickly the support team responds to queries, and more. Anything that impacts the customer’s perception of the business is included.
When advising a startup, it’s important to ask questions to determine what they are expecting and willing to spend on marketing, client experience, and top of mind awareness. This is a key component to include in the budget, and the budget truly is the roadmap to the startup’s future.
Listen to this podcast episode to learn more about Top of Mind Awareness, Marketing, and more.
Protect your business values
And finally, the third strategy is: protect your business values! Like TLC taught us in 1994, “don’t go chasing waterfalls, stick to the rivers and lakes that you’re used to.” Every successful business has defined their mission, vision, and values. These components are critical in understanding the purpose you are working towards and making sure you have the right people on your team.
Protecting your business values requires both internal and external protection. You need to make sure your team is all on the same page and you need to make sure any investors or funding sources also are in alignment.
Startup culture is what draws many people in, there is a certain charm to escaping the corporate world and getting to dig into defining a new future. But few startups will flourish if everyone on the team does not have the same passion for the vision. Without an alignment of passion and vision, the quality of work, client experience, and company culture will suffer. And this strain will be apparent to customers, even if only subliminally. Hiring someone just because their salary requirements fit your needs does not mean they will be the right person for your team, and inversely, hiring a big name can also cause cultural strain.
Protecting the company’s vision internally comes from hiring the right employees, and protecting the vision externally comes from bringing the right investors into the business. If the funding groups and investment teams don’t have the same vision, it can be detrimental to the company’s future. Bootstrapping is no picnic, but before jumping into business with an investor, there needs to be a real conversation about an exit strategy or succession plan. If the investor and the business owner have differing ideas of what the exit strategy is, there is going to be a bigger problem. An advisor can help protect startups by helping them understand what funding they truly need through True Break Even, forecasting, business planning, and more. Once they understand what funding they need, it is easier to find the right partners.
And while it can be easy to get sucked into the doom and gloom of startups’ struggles and failures, it’s important to remember that they continue to be the majority of businesses that support the economy. In fact, they comprise 99.7% of all employer firms in the U.S.2 It’s not a small task to take on advising and helping startups, but it’s impactful in ways that can hit close to home. An entrepreneur believes in their idea enough to stake their life, hope, and future on it. When an entrepreneur is successful, their immediate family flourishes, their employees flourish, and it has a ripple effect into the local community. This impact has a farther-reaching impact than is immediately apparent.
Accountants, bookkeepers, investors, and finance professionals already have many of the skills needed to help startups understand their true cash flow needs, think through marketing implications, and protect their business values. Now is the perfect time to start working with new businesses to help them launch successfully, hit their deadlines, and guide them to long-term success.
1 “The Top 20 Reasons Startups Fail.” CB Insights, CB Insights, 6 Nov. 2019, www.cbinsights.com/research/startup-failure-reasons-top/.
2 2017 YEAR-END ECONOMIC REPORT, National Small Business Association, Feb. 2018, nsba.biz/wp-content/uploads/2018/02/Year-End-Economic-Report-2017.pdf.