In this blog, our COO/CFO Simon Bernal, shares some helpful tips on finance for startups. 

I see a lot of posts and articles about the high failure rate of start-ups in the market. When you read down the list of these you can see that they could all have been signalled with plenty of time to address them if the correct systems and controls were in place. The common top 10 of these are as follows:

1. No market need;

2. Ran out of cash;

3. Not the right team or resource in place;

4. Get outcompeted;

5. Lack of financial focus (costs / pricing / forecasts);

6. Poor product;

7. Lack of business model;

8. Poor marketing;

10. Poor sales strategy and not listening to customers; and

11. Legal challenges.

An immediate response is to hire relevant people or business recovery experts (my background) to address these when, or more accurately, IF, you identify these issues. Should you engage with a firm of professional advisors? Should you hire more sales personnel to try and address the decline or stagnation in sales? How do you prioritise which is the more urgent aspect to deal with first? Do you have supportive lenders/investors or will they turn the screws at the time you need it least? Have you lost focus on the core business offering?

In my career, I have seen many companies look to try and scale their business far too soon by hiring high-level personnel whilst the CEO remains too hands on to enable that growth. I have also been astonished by the number of companies that have been run without any robust plans or strategies in place. More shockingly, the complete absence of financial forecasts to support plans was rife in some of my advisory roles, specifically short and medium term cash positions.

It is interesting that from many of the Top 10 lists identified, cash rarely features at the number 1 spot. As a qualified accountant I have always been told that Cash is King. Profit is a matter of opinion whilst it remains that Cash is very much a matter of fact. Financial models are critical to any company’s success and in my next blog I will expand further on this.

Below is some guidance to address the financial issues many start-ups may face. It contains the basic questions that will be asked of founders but also what you should be focussing on to address these financial queries.

Ran out of cash

Cash is king – remember that. Forecast how long your current cash will last and plan around this. Work out the best and worst case scenarios. As everyone says, hope for the best but plan for the worst. It will instill processes that will help achieve profitability and growth. It is crucial to remember that your P&L is not the same as your cash flow. Your P&L forecast may show tremendous profits but if you have to pay suppliers on 30 days and then you get paid at 90 days – you have to fund that gap. Remember staff also need to be paid in that time-frame. Do you need to go through a fundraising round (how much equity are you prepared to give away for this and how do you value your business?) or would a debt structure work (often an expensive option)? Have you accurately planned on the uses of those funds and how these support business growth? Get to the bottom of this and investors and staff will have greater faith in the business and it’s model.

Lack of financial focus (costs / pricing / forecasts)

This links closely to the above. But more broadly, are you actually making a profit on your sales you’re making? Have you costed projects accurately? Are you re-forecasting your financials to reflect the changing market? The problem starts when people think you need to be a financial excel wizard to develop an easy project management and costing tool. However simplistic they are they can always be refined but you must start with a basis to cost and assess profitability. Tie all of this into the financial forecasts – your P&L but also your cash flow forecasts. For your cash flow, it is imperative you have a short-term cash flow forecast (three months) to track against.

Lack of business model

The point encapsulates many of the points in the Top 10 listed above. What are you all working towards? Is the plan to maintain a lifestyle business or is an exit through a transaction the desired outcome? Have you covered all the aspects that should be included: An overview of the business; Goals (set some SMART objectives); Your audience and the market; How big is the market and who are your key competitors; Products and pricing; Who is involved; and Financials. If you have covered all of these (they are never going to be 100% accurate) you will have a framework to work within but also have a greater depth of knowledge of not only your product and service but also about the market, the competition and your route to market.

One of the primary reasons I accepted my current role was that The Sandpit actively harnesses the skills of numerous functions that start-ups require without burdening them with the hefty costs that these resources would usually come with. We are a business builder (you can read more about this from Simon Campbell here), in other words, the commercial co-founders that start-ups need.

We offer the back-office functions: we have qualified accountants to oversee finance (supported by a Big 4 firm); specialist in-house legal counsel and also a senior suite of staff to provide the operational and strategic direction. More critically we provide our senior Growth Team to push sales and also put the product through its paces with its ultimate end user. This team works hand-in-hand with our Marketing / PR teams to ensure consistency or messaging but also brand consistency. Together, this verifies the product fits the market it is trying to penetrate. Many of The Sandpit’s staff have rounded experience of running businesses but also dealing with companies that require a turnaround. We have a blend of young and energetic people balanced by the more experienced amongst us.

The start-up world needs nurturing. It requires the skills and experience from a broad spectrum of professionals which are often unaffordable. We at The Sandpit are not the perfect answer out there but from my career seeing distressed companies and start-ups facing so many overlapping issues, we’re best placed to select those we see promise in and give them the commercial co-founders they need.

Author The Sandpit Team

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