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5 most common finance pitfalls to avoid for early-stage startups

Having worked closely with tens of early-stage startups with their finances – and evaluated some hundred more in deal flow – I’ve seen the challenges that come when preparing for rapid scaling and expansion.

To help startup executives stay afloat, I’ve listed five common pitfalls to avoid when handling (or just starting to) your company’s finances:

1.     You don’t know your runway

Surprisingly many early-stage founders forget to track their cash position, and instead focus only on their income statements and balance sheets. Too often founders realise they’re running out of cash too late – while your outlook for the year might look profitable in March, if you’re not careful, you can end up running out of cash before summer’s over. A rule of thumb is that you should start fundraising six months before you actually need the money. Following your cash can be done with a very simple excel sheet where you’ll follow monthly progress. Put your starting cash at the top, then cash in and out (everything from receiving loans, to paying salaries, invoices), and at the bottom you’ll have cash at the end, which will serve as your starting balance for the next month.

2.     You’re following the wrong metrics (or not following any at all)

This is a mantra I like to repeat everywhere and it applies to almost any topic from finances to marketing and DEI – you can’t change what you don’t know and what you don’t track. So define your key metrics, but also be ready to adapt them if they don’t suit their purpose anymore. There’s no “one size fits all” metrics selection, but if you don’t know where to start, Google is your friend. You’ll find many lists of different metrics specific to your industry. For example, subscription businesses should look at MRR, churn, margins, CAC, LTV.

In addition to the basics that any investor will ask, you should look for your growth drivers: which metrics support your growth and help you identify opportunities and weak points? It will most likely take some time and experimentation before you find what works for your company, and that’s why I recommend re-evaluating them at least on a yearly basis.

3.     You don’t have a good base

A CFO might not be necessary in the early days, but should be part of the team no later than around your A-round. Nevertheless, someone on the team needs to understand finances from day 1. In addition to understanding the basics, someone needs to build your finance stack. What I mean with this is all the processes of how money flows in and out of your company – think billing, payroll, accounting, bank account, reporting. Another favourite rule of thumb: where there’s cash, there should be a process in place.

Especially in the beginning, it’s likely that most of your finance team is outsourced. It most likely comprises an accountant and maybe a payroll manager and the in-house team is the CEO with a few excel files. This is reasonable for early-stage companies, but what you definitely want to have in-house though is your analytical power, the people making sense of the numbers, and improving the business.

4.     You’re forgetting about governance

Governance covers everything from work contracts to good bookkeeping, but when I look at governance from the perspective of scaling, there are two main areas: being DD ready and board work.

Let’s start with DD. After you get a term sheet from your investors, you’ll likely get a long list of material requests for their due diligence. They’ll go through your financials, contracts and board minutes. It’s good to anticipate what might be coming and have your documents in order. Having these ready will speed up the process significantly, whereas missing documents is going to prolong the process.

Then about board work: when you have investors on your board, you’ll want to send out the materials early. A board can be a great resource for your growth, but you need to know how to utilize it. You can communicate your expectation with them by prepping through the materials and sending questions beforehand, and perhaps include a list of strategic issues you’d like to focus on during the board meeting. This ensures that you have enough time to discuss issues most relevant to you during the meeting. There are also good resources on board decks available online if you don’t know what to include.

5.     You didn’t prepare to scale

You’ll want to keep scaling in mind when building your finance stack. You don’t need to have the capabilities to handle multiple entities in many countries from day one, but keep your five year plan in mind when deciding on the tools you use. It takes time to change your accounting software and billing mechanisms, so you should recognize the need for at least a year before the new software needs to be in place. Think about which parts can be built in a scalable way from day one and where you’ll need to adjust later. If you aren’t prepared to scale, you’ll struggle when business picks up.

I hope this checklist helps you navigate the world of early-stage finances even a bit smoother. And as a word of kindness: it’s a never-ending journey of going back and forth with the amount of processes you have as you scale. Sometimes you have too few, and sometimes too many. But I guarantee, you’ll never regret that you started to care about your company finances from day 1.

(Author: Josefiina Kotilainen is CFO at Maki.vc, a European seed-fund that invests in brand-driven and deep tech companies. Prior to Maki, she was CFO at Slush, an event held each fall in chilly Helsinki to bring together the leading actors of the global tech ecosystem.

Article first published on EU Startups)

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