The Real Reason Ventures Struggle: Why numbers matter
You might not expect a product development and innovation business to be blogging about finance, but the mere fact is that many start-ups and new entrepreneurs don’t see their business’s commercial & financial model as a part of their new product (or service) journey. That makes it a key factor behind why many start-ups fail. Your numbers are as much a part of your offering as is the brand, technology, and sales support.
Cash is king when you are starting out in a new venture. 75% of start-ups fail in the first three years. This is not always because the product or service failed to deliver or have a value proposition. Often it is because they ran out of cash before they had a chance to prove it.
Most founders of new businesses are juggling many hats with limited resources. If they don’t have a finance or accounting background, the whole subject is understandably scary and not well prioritised. You don’t know what you don’t know, and therefore you also don’t know what good looks like (FYI, it’s great financial input into your business model). Many relegate finance to the ‘compliance’ basket and underestimate the value-add it can bring to your business.
Financial management and accounting are not the same thing. Financial management is forward looking, strategic and operational. It’s an integral part of keeping your business alive. Accounting is more compliance, process oriented, more risk averse, and by definition is backward looking. Accounting is largely about history. Therefore the type of resource you need for financial management may not be an accountant.
A financial manager (or financial controller or whatever you want to call it) also requires very different skills for a start-up than an established business. Some financial managers are not equipped cope or provide appropriate advice.
Here are some of the financial differences between a start-up and established business:
- Cash focused, less profit focussed.
- Shorter cash runway to work with.
- Prioritisation and focus on what it takes to get through. The ‘must-haves’ over what can wait till later.
- Unpredictable future, no historic base to forecast from.
- Anyone assisting you with this process needs to be very intimate with your business — your financial model is as bespoke as your product/service.
Here at Locus, developing a financial model goes through the same stages as developing the new product or service it relates to.
- Discovery and research phase — no history to base your financial forecast on.
- Developing your business ‘story’ and the underlying financial drivers for this.
- Embodiment of this into a financial model. Monetising your story.
- Market readiness — be it tools for ongoing financial management of your business or a business plan/prospectus for raising investment.
This is the first in a series of blogs about Finance for Start-ups. Watch this space for our upcoming breakfast meetings, too!
The series will address:
- What numbers do I need to know about my business when starting out
- What are investors looking for in your financial plan
- Common mistakes in financial models