3 finance questions for startups
The reason many startups fail early on is that the business owners fail to take into account important considerations involving finances. To that end, make sure you are asking yourselves the following:
How quickly will you burn through the money you have right now?
Even with a loan, the money won’t last forever. You need to have a keen understanding of the relationship between your reserves and the rate at which you’ll use the startup capital. According to most experts, you should ideally have 12 to 18 months of runway.
How much does it cost you to make the product or service you sell?
This will vary, depending on if you are marketing a product or service. For example, making and selling artisan pet food takes fixed costs like ingredients, equipment, labor, etc., while software requires intellectual capital and other intangibles. Still, margins will dictate profitability, or lack thereof.
What’s the difference between your growth rate and your profitability?
In a perfect world, you’d be making money and growing simultaneously. However, startups are often forced take a short-term hit to their profitability by adding talent to meet future anticipated long-term growth.
While turning a profit is usually front and center for business owners, that metric only tells part of the story. Growth is more telling, because it means that the market demand for your product or service is continuing or likely to gain momentum.
A hard look at these factors can provide meaningful insight needed to take your enterprise to the next level. If you haven’t already, investing in a small business accounting solution is a great way to keep tabs on important markers and milestones.