Rapid growth is a defining characteristic for startups, yet effectively managing this growth is the key for them to remain in business long-term. Even when startups find a viable market for their products and services, there’s still the very real danger of mismanaging their finances and failing. In an effort to help startups avoid this, let’s discuss 3 ways financial forecasting leads to business growth for startups.
- Roadmap for Strategic Planning
- Attractive Financial Presentation for Investors
- Reduces Risks and Streamlines Progress
Why do so Many Startups Fail?
Before we discuss the 3 reasons, let’s look at a recent article on Forbes called: “90% Of Startups Fail: Here’s What You Need to Know About the 10%”, written on Jan. 16, 2016 by Neil Patel. The article explains,
“Nine out of ten startups will fail…A careful survey of failed startups determined that 42% of them identified the ‘lack of a market need for their product’ as the single biggest reason for their failure.”
This high rate of failure is caused around half the time because there was no market for their products or services, which means the other half was caused by what? Well, the article goes on to explain two other main reasons, including the lack of team cohesiveness and, basically, a lack of financial forecasting. The article explains,
“The second major reason why startups fail is that they ‘ran out of cash.’”
The high failure rate for startups is startling, yet not surprising when we consider how many are started and their intrinsic nature. According to Wikipedia and the SBA, startups are a “’…business that is typically technology oriented and has high growth potential.’” Startup businesses, generally, cost less to start than traditional brick and mortar businesses, yet have a higher potential for accelerated growth (e.g. Sharing economy, SaaS, etc.).
#1. Roadmap for Strategic Planning:
What the evidence shows us is: there’s more to creating a successful startup than just having a viable product. Essentially, this means startups need to develop a viable strategic vision for all business processes. Finances are at the core of all business processes, so it makes sense to focus on this aspect before all others.
Startups that develop financial roadmaps for the coming weeks, months, and years, are setting the foundation for strategic planning. Innovative business strategies are what directs a startup’s growth, and the parameters are constructed around financial projections. Therefor, financial forecasting paves the roadmap for strategic planning, helping to prevent failures from common pitfalls.
#2. Attractive Financial Presentation for Investors:
In-house expertise, professional services, and innovative software tools, all help with financial forecasting and planning: professional looking profitability analysis and financial reports, produced from this ongoing effort, help to attract investors for working capital. Startups, many times, are heavily dependent upon investors for short and long-term stability, often relying on meeting deadlines for projected growth; even when startups have significant growth, if growth projections aren’t met key investors may be lost.
With viable strategic planning and sustainable financial forecasting, startups will attract investors and be able to meet projected time-lines of growth. With consistent and diligent efforts to professionally conduct financial forecasting, startups will attract quality investors with effective presentations of business growth projections. This effort would be enhanced with professional expertise in this area.
#3. Reduces Risk and Streamlines Progress:
When startups focus on financial forecasting from the beginning, they’ll reduce risk and develop streamlined progress within business processes. The main risk to avoid is failing because of a lack of finances; all businesses are powered by their finances, which need to be in the right place at the right time for streamlined business processes to occur.
Projecting future business growth is accomplished by understanding the financial patterns and foreseeing any obstacles in the way. Taxes, payroll, regulatory burdens, compliance, and liability issues, are all potential risks that can be avoided, managed, and minimized with financial forecasting. Basically, startups will greatly benefit when they effectively plan ahead and understand their finances.
Conclusion
The growth and profit potential for startups is great, yet so is the risk of failure, according to industry expertise. Developing a product or service that people want is the first objective, effectively managing the finances is the second. These 3 ways financial forecasting leads to business growth for startups, should help startups effectively manage this essential business component.
Many times, startups are working with limited: resources, expertise, and experience, which may lead them to neglect financial forecasting. In these cases, startups should consider outsourcing part or all of their CFO duties to an experienced and comprehensive CPA service.
GMLCPA offers to be this comprehensive CPA service for startups with services including: cloud accounting, payroll, business consulting, innovative software tools, and financial forecasting. By partnering with GMLCPA, startups will gain the experience and expertise needed to make their finances work for them. Please contact us today for a free consultation.
