Effective financial management is crucial to the success of any startup. However, many founders tend to overlook this aspect of their business, resulting in a high rate of failure during the growth stages. The reasons for this can range from a lack of financial knowledge to a disregard for the importance of financial planning.
To shed more light on the issue, we spoke to Henry Asare Adjei, a seasoned financial analyst and CEO of Prime2Prime Ideas Ltd, a financial consultancy firm based in Ghana. In this article, he provides valuable insights into the importance of financial management and the risks involved in not prioritizing it. He also shares practical tips that startups can implement to achieve sound financial management and ensure their long-term success.
Prince Akpah: What is Financial Management?
Henry: Financial Management (FM) is the efficient management of funds in a way that will accomplish the organizational objectives. Some FM begins with budgeting through to reporting after auditing. FM is a function of management that targets each cedi or dollar to specifically planned expenditure.
Prince Akpah: How important should it be considered in relation to the lifespan of startups?
Henry: The critical success factors of every startup depend on three major pillars:
- Understanding of market – properly defined mission, vision, core values and strategy to scale and sustain.
- Management Capacity – the right human resource to lead and drive the vision to attainment. And
- Financial Management – strategies to ACQUIRE (raise and/or generate), RECORD and APPROPRIATE (spend) the funds of the startup at achieving objectives.
It is, therefore, a very key aspect of every startup lifespan that if not properly handled will be detrimental to the sustainability of the startup. It is important for startups to know that the subject of FM is so important to the extent that large corporations dedicate a full department for it. Think about it, it is the management of the lifeblood of the organization and so if you do not place importance on what is your blood, I do not know which else will be important.
Prince Akpah: What Module should startups put in place for spending?
Henry: FM has three important elements that every startup must avert their minds and attention to. These are BUDGETING, RECORDING, and REPORTING. Spending must always be made with these three key FM activities in mind. The first BUDGET what you want to spend, RECORD what you spend and REPORT what you spend. This is a whole course of study but in simple terms, if you manage your spending in line with the aforementioned procedure, you will be prudently managing your finances or spending.
Prince Akpah: What tool can startups make use of to ensure good record?
Henry: There are a number of financial reporting tools available, both customize and general. For startups, there is simple recording tools such Excel workbook that can be developed to suit their need but most importantly have receipt books, invoices, and payment vouchers to make simple transactional recordings easy. You can also buy exercise books to record transactions. All these can be digitized by creating financial recording templates and save them in folders that can be used as data when deploying financial management software.
Prince Akpah: What risk is involved in mismanagement in a startup?
Henry: This is obvious; the collapse of the startup. In financial mismanagement, it will start with bankruptcy and dissolution of the business. If I want to look at it in terms of not adhering to the principles of BUDGETING, RECORDING, and REPORTING as outlined above, I can mention a number of risks. To mention a few I can say without BUDGETING you risk spending haphazardly and without priority which end up making you lose money unnecessarily. Without RECORDING, you lose track of your spending and you make room for speculations and fraud and without REPORTING you risk speculative tax which can be more as well as not be able to raise funds or get financial support. All these risks lead to the collapse of the startup.
Prince Akpah: How do we encourage records keeping in startups?
Henry: As I have already indicated in my response to question 2) above, lack of proper FM is a recipe for startup collapse and this has accounted to together with the other two have accounted to 6 out of 10 startups collapsing. There are three major ways to encourage records keeping in startups.
The first and my best recommendation are to start a business under guidance and mentorship at a Startup Incubator Hub. The hubs have carefully structured programs to ensure startups have a maximum understanding of how to scale up and sustain growth and records’ keeping is a key aspect of this training.
The second is to organize training and seminars on records keeping as a means to expose these startups to the importance of this business growth function.
The third and final is to offer records keeping service to the startups as a means to keep them functioning and in line with best practices.
Prince Akpah: Should one Hire or Manage your finance personally?
Henry: I believe is in relation to startups, if so I will say the choice will be determined by the size of the business in terms of value. When a business is at the startup’s stage, the cash flow is usually slow and limited in terms of sources and amount. The owner or manager can keep the records himself or herself until it is difficult by the regularity to keep. It is important to note that hiring someone to manage the finance as a cost factor and as a startup, it is important to as much as possible reduce your cost drivers or expenditure items. Entrepreneurs or startup managers should manage their funds when their company is starting. When the load becomes overwhelming, hire an administrator with the responsibility of financial management and put systems in place to guide the administrative personnel. When the management is becoming complex, you can hire an accountant to manage this aspect of the organization. One cost-effective approach is to hire a company that can help in the financial management of the firm. This takes away the other cost burdens of employing someone at the infant stage of the company.
In conclusion, I can say that the subject of Financial Management is a topic that needs time and attention to avert wrong procedures and therefore requires expert advice.
NB: This article and interview was done by Prince Akpah in 2017