Five risks startups take when it comes to money and how to avoid them

Whether you’re getting your finances sorted for the first time or are seeking a fresh injection of capital, we outline five high risk financial areas for startups

Leigh Dunsford, co-founder of Loandesk refers to cash flow as a “silver bullet that everyone wants to know how to manage”.

It’s a critical factor for any budding startup, and is equally relevant whether you’ve been in business for five months or five years. But cash flow is just one high risk financial area that can lead a startup into hot water.

Here’s a few other things to consider…

1. Get your paperwork and business plan in order

“It’s amazing how many startups will approach a bank without pre-planning,” Dunsford says.“But banks are document heavy and if you have a casual conversation, you’re sure to be turned away.”

It’s common practice for business bankers to ask for a comprehensive business plan, and in most cases, they’ll also want to see your assets, and what supplementary income you have to service the amount borrowed.

“If you can’t provide answers or show these things, you just won’t get a loan. It’s a tough love situation as far as the bank is concerned,” he says.

2. Choose potential investors wisely

If you’re seeking finance, particularly from investors, remember you’re not just after cold hard cash.

“You want people that can help your business, people that can open doors for you, or provide advice on things like when to pivot,”says Lars Lindstrom, chief executive officer of StartUp Victoria. “It’s about more than just the money.”

“You also need to know who’s looking for what as an investor,” says Clare Hallam, chief operating officer at online venture builder Pollenizer.

Hallam cautions that some investors are happy to be in the background, whilst others can be a “hands-on” nightmare.

“It’s important to find the right investor, it’s like a marriage and it’s crucial to your success. Rarely does a startup get it 100%right, but think about how you’ll grow with the investor in the future, and ask yourself, ‘am I taking the money for the right reason’?”

3. Know how much your idea/product/service is really worth

When you’ve put your blood, sweat and tears into a startup, it’s easy to believe your own hype. But Hallam cautions against it, and warns that if you follow the angel investment or venture capital path, you may have to give away a bigger slice of your startup than you first bargained for.

“A lot of entrepreneurs think their startup is worth more than what an investor would value it at. But you need to be able to show a real solution to a real problem, and know who your customers are. You also need to be able to show some traction – you need to prove that you’ve already started solving that problem for customers. And that you have customers who are prepared to pay dollars for it,” she says. “Even then, you might have to give away a bigger slice of the pie than you intended.”

4. Don’t underestimate time and capital

“Everybody underestimates the amount of capital they need when starting out. It always costs more and takes longer. It’s universal,” Lindstrom says.

Hallam agrees. “Startups often don’t see it until they’re almost out of money, or they underestimate the timeframe it will take for money to be received in their accounts. Even if they secure investment, it can take months for it to appear in their bank account, and they don’t have a contingency plan if it falls through.”

So what to do in these situations?

“Go out and get some customers, and get some traction. Get people interested in your product and traction will attract money. You just keep doing what you’re doing, close deals with customers and when you get closer to the abyss, you go and raise some money because now you can prove that customers want your product or service. It’s very hard to raise money before you’ve done anything, but there’s plenty of money for people that can execute good ideas,” Lindstrom says.

5. Don’t overcommit your finances

Once you’re officially ‘in business’ it’s tempting to want to make a big splash with a cutting edge logo, fancy business cards, or sleek offices. But as Dunsford notes, a bank account flush with borrowed money always needs to be paid back.

“When you get a loan, you need to plan. It’s not to pay for a new office chair or desk – it’s to grow your business. You need to spend that money on income producing activities. Borrowed money is an investment in the business. It needs to be invested into something that’s going to generate sales which will make you profit, so you can make the payments back, and then hopefully one day you’ll not have to borrow money,” he says.

Dunsford also recalls stories of startups that have overcommitted on their fixed costs. “We’ve had startups come to us and they have a big office space with just two people working in it. In the early days, you really need to keep your fixed costs down and stick to variable costs. Don’t lock yourself into a lease for an office space or take on staff you really don’t need.”

Written by: Megan Gamble

This article is sponsored by Australia and New Zealand Banking Group Limited ABN 11 005 357 522 (ANZ). The views and recommendations that are made in this document are those of the author and not ANZ. To the extent permitted by law, ANZ disclaims liability or responsibility to any person for any direct or indirect loss or damage that may result from any act or omission by any person in relation to this material..