How to manage finances in a startup

You've come up with a business based on your billion-dollar idea. You have your starting team together and have even gotten your first clients. But how should you keep track of your income and spending to stay on the right side of the law, get venture capital funding, and get your business ready to grow?

Most business owners and founders don't know much about finance or accounting, and it doesn't always make sense for a new company to hire a full-time finance manager. Because of this, managing the money for a company can seem like a hard and complicated job. Here are five important money tips for business owners from other business leaders that will help you set up your accounts in a way that helps your business grow.

5 Ways Startups Can Better Handle Their Money

1. Set income goals that you can reach.

When someone starts a business, they have big plans for its future, but it's important to be realistic about how much money they want to make. Tanya Zhang, co-founder of Nimble Made, says, "Break down your financial goals into manageable and verifiable milestones." Zhang says that setting goals for intermediate income helps you stay on track and shows you what changes need to be made.

Start-up financial planning and estimates can help you figure out what goals make sense for your business as it grows. These tools will help you plan your business, make a strategy, and make predictions. They will also be very important when you show them to possible investors. 

Read also: Global Startup Ecosystem Ranking

2. Set spending priorities.

Any business that wants to grow will have a lot of different costs. If you want to stay on top of your budget and avoid cash flow problems, you should separate the necessary and preferred business costs. You can use your limited cash in the places you need it most by putting things into these groups.

Then, you should compare your real spending to your budget on a daily basis. This will show you where you are spending too much and need to make changes to avoid cash flow problems. This is an important money-saving tip for any new or small business. Read our article 4 Tips To Optimize Expense Management For Startups to learn more.

Once you know where you're regularly going over budget, you need to cut costs right away: "Sometimes, a few small changes here and there can help you lower your monthly costs," says Michael Hammelburger, CEO of The Bottom Line Group. "In other situations, you may need to think about other big ways to cut costs."

One more important thing to remember about startup costs: keep your business and personal funds separate, and don't mix your business and personal spending. Startups that mix personal and business funds will have a hard time raising money, paying taxes, and getting a clear picture of their startup's financial health in the future.

3. Get ready for stock options for employees.

You might want to offer stock options as part of employee pay deals to attract and keep bright team members. There is a stock option pool for many startups that is equal to 10-15% of all the shares. VCs almost always want this choice pool to be included in the company's pre-money value if you want to raise money through fundraising, warns Ben Richardson, CEO of Development Academy. In other words, the amount of stock options comes from the founder's equity, not the investor's equity. Richardson also tells startups that if they want to hire more people in the future, they should be aware that this will make the founders' part of the company even smaller.

Read also: Venture capital funding plunges in the aftermath of bank failures.

4. Set aside time to keep correct records.

There are so many things that startup founders have to do that it's easy for them to forget to keep accurate and up-to-date financial records. Caroline Lee, co-founder of CocoSign, says, "Many documents get lost, which makes it hard to balance financial statements when consolidation day comes."

It's hard to keep track of cash flow when accounting records aren't correct or follow GAAP. This can cause losses and make it more likely that taxes will be filed late. If you don't have the time or skills to handle your money properly, you might want to hire a planner or accountant: If you hire someone to keep your financial records, you can focus on building your business and avoid making mistakes that will cost you a lot of money.

5. Take charge of your money management by being aggressive.

"A little work up front will save you a lot of trouble later on." As Binita Thakker, Financial Controller at Zeni, put it, "Take the time to set up your accounting system ahead of time so you don't have to scramble when your business gets busier."

Here are some first steps you can take to make sure your business's earnings are ready for success and to avoid common money mistakes:

• From the start, use professional financial tools. For a small fee, software systems like QuickBooks Online offer a variety of reporting tools and interfaces, including payroll, AP/AR, bank accounts, credit cards, and more. This makes it easier to keep your books every day.
• Pay attention to what information the business needs now and in the future, and make sure that your startup's chart of accounts has enough groups to hold all of that information.
• If your business already has its own bank account and credit cards, make sure you connect them to your accounting software so that all of your transactions flow into it instantly.
• Take the time to write down any charges you make on your personal cards so that you can claim them as work costs.
• Keep track of non-cash costs like gas for your car and professional cell phone use (for you and your workers).
• Think about using a PEO company to offer competitive benefits and perks that help early-stage startups hire the best people.
• Find out what your company needs to do to be compliant and make a plan to do it on time. For example, you may need to make expected tax payments, file tax forms late, report 1099s, or do something else.
• Working with a startup accountant from the start will help you build a strong base for your business's finances and avoid having to do more work or change your plans later on.