By Omoruyi Edoigiawerie, Esq
Running a start-up is challenging from planning, financing, and administration to corporate governance, the struggle is real, especially if you’re an early-stage start-up. Lack of proper financial organization is one of the most frequent reasons that start-ups fail.
As a start-up lawyer, one piece of advice I give my clients is to ensure that they take charge of their start-up’s financial health early on.
Facing financial difficulties and handling this from the very beginning is the best way to keep your start-up afloat and set it up for lasting success.
Many new businesses fail within the first few years for many reasons. While some simply run out of money, others fail to put their products out there in a scalable way. These two interconnected reasons are the most cited reasons for start-up failure.
Having worked closely with a wide spectrum of early-stage start-ups, especially advising with their financing agreements, I have been able to compare and determine the challenges that come when preparing for rapid scaling and expansion.
To help start-up companies circumvent these challenges, I have listed five common pitfalls to avoid when handling your company’s finances:
1. Failure to track cash flow:
It is interesting to note that many early-stage founders forget to track their cash position, and instead focus only on their income statements and balance sheets. Too often, founders realise they’re running out of cash too late. The truth is, the company’s outlook for the year might look profitable in the beginning, but without being circumspect, they can end up running out of cash before the profits start coming in because they weren’t prepared for the roadblocks that come their way. One very important rule is to start fundraising several months before you need the money. There are numerous tools online that can help you track and monitor your cash flow such as a very simple excel sheet where you’ll monitor your company’s monthly financial progress.
2. Following the wrong metrics
As the saying goes, “you can’t change what you don’t know and what you don’t track”. So, defining your key metrics is an important aspect of financing. However, as much as you have defined your metrics, you must also be ready to modify them if they don’t suit their purpose anymore. Truth be told, there is never a “one size fits all” metrics selection. Be ready to explore and do extensive research on metrics specific to your industry which you may need to adapt to suit your business. Another very important aspect is to identify your growth drivers: which metrics support your growth and help you identify opportunities and weaknesses? It will most likely take some time and experimentation before you find what works for your company, and that’s why it’s important to ensure you re-evaluate them as often as possible, and at least every year.
3. Failure to have a CFO or a Finance Manager
As a start-up, there is a tendency that you may want to get a CFO or a finance manager at a later date because of the responsibility of paying their fees or salaries, but having someone who understands finance on your team saves you a lot and should be part of the team from the very beginning. In addition to understanding the basics, someone needs to build your finance- this means all the processes of how money flows in and out of your company, such as billing, payroll, accounting, and financial reporting. In the beginning, most of your finance work is likely outsourced. This is reasonable for early-stage companies, but you should also consider having at least one person in-house; these are the people making sense of the numbers and improving the business.
4. Poor Governance structure and absence of Legal Counsel on Retainer
Governance covers everything from work contracts to good bookkeeping, but when I look at governance from the perspective of scaling, there are two main areas: Due Diligence and Corporate Governance /Board structure. Concerning due diligence, it is good to understand that after you get a term sheet from your investors, you’ll likely get a long list of material requests for their due diligence. They’ll go through your financials, contracts, and board reports. You must anticipate what might be coming and have your documents in order. Having these ready will speed up the process significantly, whereas missing documents may prolong the process. Concerning board meetings, when you have investors on your board, you’ll want to send out the materials early. A board can be a great resource for your growth, but you need to know how to utilize it. You can ensure that all these contractual documents, board documents, governance, and compliance are adequately taken care of when you have a lawyer on retainer. Legal counsel makes things easier and prevents gaps that can cause investment doubts in the mind of your investors.
5. Failure to prepare for growth.
It is important to keep scaling in mind when building your finance. You don’t need to have the capabilities to handle multiple entities in many countries from the onset but keeping your five-year plan in mind when deciding on the tools to use ensures you are on the right path. It takes time to change your accounting software and billing mechanisms, so you should recognize the need for that at least a year before the new software needs to be in place. Think about which parts can be built in a scalable way from day one and where you’ll need to adjust later. If you aren’t prepared to scale, you’ll struggle when business picks up.
As a start-up, these principles will not only help you navigate the world of early-stage finances but will ensure you have things a bit smoother from the onset. As you know, running a business, it’s a never-ending journey of going back and forth with the number of processes you have as you scale. Sometimes you have too few, and sometimes too many. But be always assured that you’ll never regret you started to care about your company finances from the onset.
Omoruyi Edoigiawerie is the Founder and Lead Partner at Edoigiawerie & Company LP. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. His firm can be reached by email at: hello@uyilaw.com
