The financial performance reveals the level of success that a startup is making. Pursuing a profitable business is the ultimate objective that every entrepreneur is looking for. The profitability of a startup coupled with a healthy cash flow is definitely evidencing the right financial performance of a startup. I have listed below the key tips to improve the financial performance of a startup.
1. Set financial objectives:
You set the annual financial objectives for your startup including, revenues and growth, cost of production and overhead, net profit and growth, return on capital and investment, cash flow, investments and capital structure (loan and equity). The value of setting financial objectives is to measure performance and assess the viability of a business.
2. Evaluate external & internal influences on financial performance:
- External influences: Competitor actions, market forces, economic factors( i.e. recessions, inflation, interest), political & legislative factors ( i.e. increase minimum wages, safety and health legislation), technology (i.e. impact ways of collecting and analyzing data as well as running a business).
- Internal influences: Corporate objectives, resources available and operational factors.
3. Construct an annual budget:
- Cash in: Including, revenues, decreasing net working capital, selling fixed assets and investments, short-term and long-term investment dividends, taking loans and increasing equity.
- Cash out: Including, operating expenses, non operating expenses, purchasing, investing in working capital, investing in fixed assets and investments, repaying loans and obligations and dividends.
- Net deficit and surplus and refunding: It is calculated as cash-in minus cash-out.
- Difficulties of setting budgets: No historical records, forecasting problematic, funding difficulties.
4. Control budget:
It is to monitor actual spending against planned one for each item on regular intervals. Variances are positive and negative. Decisions are to eliminate negative variances and motivate positive variances. Tactics for negative variances are including, reducing expenses, reducing purchasing prices, postpone investments, delaying repayment of payable, reducing credit provided to customers, increase advertising budget, reduce selling prices to push sales up.
5. Forecast cash flow:
Forecast the annual cash flow from operation, investment and finance.
6. Estimate the breakeven point:
Construct a breakeven chart, and calculate the breakeven point as sales quantity or value. It can be calculated as annual fixed costs (or overheads) divided by the gross profit per sold unit. Influences of the breakeven point are the selling prices, quantity sold, fixed cost and variable cost. The value of the break-even point is to estimate the breakeven point and profitable sales. The key withdraw of the breakeven model is that It is a static model and it will be difficult to operate in a business dynamic situations.
7. Analyze profitability:
- Gross profit margin: Gross profit/ sales revenue.
- Operating profit margin: Operating profit/ sales revenue.
- Net profit margin: Net profit/ sales revenue.
8. Make financial decisions:
Whether your startup is in the pre-operating or operating stage, you will need to make the following financial decisions:
- Estimate funds required: You estimate the funds required to finance capital costs and operating expenses of the startup. Funds required must be scheduled and classified based on the source of finance, urgency and priority.
- Identify Sources of finance: Internal ( cash flow from operations, investments and finance); external ( loans, selling equity shares, merging, acquisition). You decide on the best sources of finance based on cost and terms of finance.
- Improve cash flow and profit: including, improving sales, increase the utilization rate of capacity, encourage leasing and leasing back, control of operating and capital expenditures, good management of cash flow from operations, investments and finance, increase efficiency and productivity.
Prepared by: Munther Al Dawood-
Enterprise Development Professional