Financial management matters
Financial management is essential for any business startup for the following reasons:
- You will have to know something about costs and revenues and you will be able to work out economic contribution your business makes.
- You will need to know where to be in future (forecasting and projection).
- You will know if your business is profitable and scalable or not and why.
- You will need to know the financial position of your business and how to make it more liquid and profitable.
- Are you using the fewest resources you can to generate the most value possible.
- You will need to know how to cost your products and set the right pricing strategy.
- You will need to know about valuation and funding of your business.
- You will need to monitor and evaluate performance of your business.
- You will need to achieve profit and make business grows.
- You will need to plan business and set strategy for exit.
- And more…
Business model is different
In principle, the business model for a technological startup distinguishes from a traditional business as due to the following conditions:
- The heart of technological change lies in disruption. It is aiming at a new form of benefit for consumers. To do so, business model should be innovative and take in consideration various business factors, such as customer segmentation, value propositions, revenue streams, channels, key activities, resources and cost structure, to develop and deliver the right value to target customers. The business model should be innovative enough to create disruptive values.
- Business model in tech firms may hinge on better quality of supply, more transparent service, lower price, new ways of bundling services and entirely new drivers of value that will create their own further market needs. Tech business is always about making a difference while creating value.
- Revenue models can be a freemium (free download or services), advertising, crowd users, subscription, price per user, e.commerce, brokerage, partnership, lead generating model. These revenue streams will vary among tech startups and depends on the nature of business model for each tech startup.
- Tech business derives values from creating and managing networks (producers, consumers and users); however, traditional business will highly depend on the consumers to create and capture values.
- In tech startup, focus is moved from the supply into the demand side, trying to develop product that customer want with lower selling prices.
- Tech business aims at creating innovative product that most fit the market and customers’ needs. This value creation will be handled through business model and lean startup methodology that works on step by step with customer validation and scalability.
- Resources required by tech firms are different from those required by the conventional firms as tech firms manage resources related to technology and obtained through externalizing activities with stakeholders.
- Tech firms manage multi and diversified sources of information (i.e. big data), as opposed to conventional firms, which manage more narrowed and focussed information.
Task (1)- Financial management used for the tech firms will be enabling innovative business-model that aim at creating values, managing resources and managing customer expectations.
Tech startup looks for potential business
Tech startup is characterized by critical factors that influence its value. Such characteristics are focusing in making disruptive value, achieving higher growth, capturing high market share, selling with low-end prices, incurring high fixed cost compared to variable cost, achieving high profit returns, associating with business and financial risks and aiming at qualifying the business for an exit and making a huge profit.
Task (2)- financial management should be ready to take this in consideration and meet the requirements for tracking & achieving the desired growth.
Tech. startup is ready for the ‘Stars’
A tech startup will relentlessly work to be successful, as through achieving a growing business and capturing big market share. To achieve all of this, it will be a ‘Star’ according to the matrix designed by the Boston Consulting Group; where, success of a startup business is influenced by the matrix of growth and market share factors.
Task (3)- financial management should be ready to take this in consideration and meet the requirements for tracking & achieving higher growth, market share and being a Star.
Tech. startup is ready for exit
A tech startup should have a clear vision and strategy toward growth and exit. One of the successful tool for strategy thinking is the Porter’s 5 forces. Porter has come up with three strategic focusses, which are focus, leadership for lower cost and differentiation. For tech startups, choosing the right strategic path is essential to succeed and to exit.
Task (4)- financial management should be ready to take this in consideration and meet the requirements for articulating the right strategy.
Tech. startup aims for high profit
In principle, tech startup is characterized by big fixed cost and capability to make a disruptive value. For that reason, a tech startup will aim for achieving higher level of market penetration and sell will higher volume to be able to upset big fixed cost and turn out profitable. This can be achieved through applying multi business tools aiming at enhancing sales, growth and profitability. Actions are including, developing a disruptive value, selling to low-end customers, acquiring a huge investment from different sources,…etc.
Task (5)- financial management should be ready to take this in consideration and meet the requirements for tracking & achieving the high-volume of sales and profit.
Tech. startup is challenged for high risk
Startups face two broad categories of risk. The first is business risk (changes in sales and its effect in profit) and the second is financial risk (potential losses and default). Startups usually work in higher risk and thus investors will require higher return to compensate higher risk (business & financial). Most of investments in a tech startup is considered a fixed cost and it is considered sunk the time it is invested. This will lead startups to focus in market activities and capture most of it.
Task(6)- financial management should be ready to take this in consideration and manage risk.
Contribution analysis is vital
Tech business is always having a high fixed cost and low variable cost. In this situation, tech business will aim at volume of production and sales with low end prices. This explains why most of high-tech business, like Amazon, linkedIn and others will spend the first 2-4 years making loses and until they manage to overcome the breakeven point at the higher level of sales. The contribution margin (gross profit) is the difference between the sales and variable cost (cost of good sold). This tool is quite important for any industry and will be a great input for setting up the sales and pricing strategy. The key issue in pricing is to price at level that will generate enough contribution margin to cover the overhead and achieve profit.
Task (7)- Tech startup will need financial management that will manage the contribution margin, break-even point, set sale targets and profitability.
Financial reporting matters
A startup business will conduct financial analysis through analyzing three basic financial reports or statements: income statement, balance sheet and the cash-flow statements. It is usually generated at the end of the financial year and subject to external financial auditing. These financial statements will tell us how profitable and efficient is the startup so far and indicate about the future performance.
Task(8)- Tech startup will need financial management to arrange accurate & reliable financial statements for the uses of owners, investors and other stakeholders.
Financial analysis is a must-do
A tech. startup will conduct a financial analysis at the end of operating period, i.e. a year, to find out the profitability and efficiency in managing resources and to project for the future. Analysis can be done using multi-discipline methods, such as ratio analysis. Such ratios are liquidity ratios, profitability ratios, investment ratios, efficiency ratios and capital structure ratios.
Task(9)- Tech startup will need financial management that will enable financial reporting and analysis.
A tech. startup is usually getting cash through revenues, capital, loans and others. The important source of cash is that the one generated from operating revenues. To have a proper control of cash, cash flow projects are tied with the budget and projected expenditures. A tech. startup will usually incur high operating and capital expenditures during the first years of operation and thus the need for cash and control is immensely important.
Task (10)- Tech startup will need financial management that will enable to prepare financial reports, set financial budget, monitoring and control performances.
Value and finance are must-do
For raising capital as equity, it could be made by issuing ordinary/common shares at bar value or with premium. The holder of shares owns an equity share at a business, will have the right to vote and will be entitled for dividends and capital gains. For preference shares, the holder of preference share will be entitled for specific and fixed return every year. Preferred shareholders will have priority in liquidation and distribution of dividends over the holders of common shares. However the claim of creditors still take precedence over those who owned preference shares. They usually don’t vote over the management of the corporation. For treasury shares, when a corporation buys back its outstanding shares and holds on to them for future use. Finance can be also made through loans from banks and other finance institutes. The fund-raising techniques are crowdfunding (online funding), bootstrapping (savings), friends and others. Venture capital valuation is conducted through different ways such as, discounted cash flow, price/earning, capital share, evaluation of assets, similar cases, rule of
Task(11)- Tech startup will need financial management that will enable business valuation and financing.
Growth must be tracked
Making profit and reaching the desired level of growth is highly connected with the Customer Lifecycle Value (CLV) and the Customer Acquisition Cost (CAC). The CLV is calculated as the present value for the gross profit per a customer during its entire life cycle with the company. The CCA is calculated as the total cost of marketing and sales divided by new customers over specific period of time. The tech startup profitability is usually evaluated based on the difference between CLV and CCA. As an entrepreneur, your assignment is to build and grow your business venture for selling at the end of period (i.e. 5-10 years). To successfully sell your shares in a business, a business must prove profitability, higher growth and optimistic business future. You should think of an exit strategy from the beginning of starting a business by setting business KPIs. How to liquidate your shares in a business. This can be done through IPO, merging, selling to individual investors.
Task(12)- Tech startup will need financial management that will enable tracking growth.
Call for Action:
You please feel free to feed me back with your comments and suggestions. Should you need a training or mentorship or advising assistance on startup’s businesses, You please contact us. For more details, you visit our website http://www.growenterprise.co.uk.
- Information Bank @ Growenterprise.
- Blogs @ Growenterprise.
- 8 Core Skills Every Digital Entrepreneur Needs
- Financial Skills Every Entrepreneur Needs
- Cost-Accounting Skills Every Entrepreneur Needs
- 101 Capital Funding For Startups
- Step By Step To Build Your Customer Development Model
- 3 learnt Lessons In Crossing The Chasm
- 9 Steps to a Successful Disruptive Innovation
- 8 Core Skills Every Digital Entrepreneur Needs
- 5 Principles For Lean Thinking
- 8 Steps for a Customer Development and Lean Validation
- 20 Best Games For Teachning Entrepreneurhip
Written by: Munther Al Dawood
Enterprise Development Services
Inspired by the book: Bhimani, A. 2017. Financial Management for Technological Startups, Kogan Page, London UK.