Profitability is an extremely important goal for any startup — but profitability doesn’t just happen. There are many reasons to treat your startup like a profitable business from day one. Operating your business under the assumption that it’s already profitable will establish critical workflows and business practices that ensure your startup succeeds in the long term.
All tech startups begin as a concept. The most important difference between a tech startup and a traditional new business is the core objective that drives each. Small businesses are, in most cases, driven by stable long-term growth, value, and profitability. Tech startups are, in contrast, focused on rapid growth, potential, and top-end revenue.
While tech startups may start out as a groundbreaking or innovative concept and grow into a business, it’s important to treat a tech startup as a profitable business from the very start in order to ensure it succeeds. The vast majority of startups fail because the founders that drive them fail to recognize the importance of critical factors such as accounting, cash flow management, and business structure.
Startups typically operate in a different manner when compared to traditional businesses, but still follow the same rules — without a solid growth strategy, neither a startup or a small business can succeed. Tech-oriented startups are also obligated to maintain an awareness of trends in their industry and keep up-to-date on the latest tools, payment methods, and technologies that can be used to give them a cutting edge.
Treating your tech startup like a profitable business from the start will make sure the business processes that your startup is built upon will scale with it. The following six rules will ensure your startup stays ahead of the curve and operates like a profitable business from day one:
1. Practice Effective Cash Flow Management
Nine out of ten startups fail solely due to improper cash flow management. Understanding each and every inflow and outflow of cash from your tech startup is essential when operating your business as if it’s profitable from day one. The core principle that drives effective cash flow management is delaying the loss of cash wherever and whenever possible, while capturing remittances owed to your startup as fast as possible.
There are five key principles that can be used to summarize effective cash flow management. These principles will minimize cash flow surprises and obstacles, ensuring your tech startup has the capital it needs to scale rapidly:
- Document your cash flow projections
Startups both large and small must document cash flow projections in order to operate in a profitable manner. All startups, regardless of the stage of growth in which they are in, consist of multiple moving parts. Developing accurate documentation for your cash flow planning will ensure your tech startup is prepared for any eventuality.
- Don’t mix profits and cash
A startup that begins to generate cash in the early stages of operation will often make the mistake of confusing income with available cash. Early profits should be directed back into your tech startup to boost growth and business stability.
- Predict expenses
All businesses, including startups, experience unanticipated expenses that can significantly damage short-term cash flow. Equipment failure, the loss of key personnel, or unplanned pivots should be taken into account when making a concrete cash flow projection.
- Scale sensibly
Growth is good for a startup, but scaling too fast can damage the long-term stability of a startup. Rapid, unplanned growth can result in unpredictable costs that quickly run out of control.
- Predict late payments
Invoicing clients is critical to the cash flow health of a startup, but getting paid can be difficult. Startups need to invoice early and often when developing a cash flow system in order to mitigate the expenses incurred by late payments.
2. Track Your Spending
A new startup will incur many expenses and costs. In order to remain in business and work toward a profitable stage, a new startup needs to keep on top of all spending. In many cases, tech startups can’t afford the expense of hiring a full-time accounting staff member. Cloud accounting solutions and other online financial tools can help startups to track spending without breaking the bank.
3. Establish Financial Goals
Goal setting is essential to the success of any business, and is critical to the growth of a tech startup in the bootstrapping stage. Startups need to break down financial goals into quarterly, monthly, and weekly goals that are clearly defined by KPIs. A solid financial goal structure will allow a startup to set key milestones and make adjustments when necessary.
4. Separate Personal and Business Finances
The self-funded startup is an increasingly popular model used by tech-oriented entrepreneurs to bootstrap their business idea without the need for traditional finance or funding rounds. Operating your startup as a profitable business necessitates a clear breakdown between personal finances and business finances — a startup should maintain separate bank accounts from founder finances.
5. Stay Ahead of the Payments Curve
Tech-oriented startups benefit from a forward-leaning structure that allows them to take advantage of new developments in the way they interact with and invoice clients or customers. Startups in the tech sector, for example, are beginning to accept cryptocurrency as a payment method.
Digital currencies such as Bitcoin are becoming increasingly popular with startups seeking low-cost remittance options, and are simple to set up.
According to Winston Nguyen, founder of BitcoinSEO, a marketing agency that accepts bitcoin as payments, “getting started with crypto payments at your startup doesn’t require costly infrastructure — all a startup needs is a reliable and secure wallet solution in order to begin accepting digital currency payments immediately.”
Cryptocurrencies also allow startups to leverage a wide range of trading and exchange options. Tech startups have the option of exchanging cryptocurrency on decentralized platforms that allow crypto holders to trade on a peer-to-peer manner through atomic swaps. It’s possible for a startup to get paid in one crypto and exchange it for another that can be used to pay for business expenses without using fiat currency at all.
6. Create an Effective Tax Strategy
Lastly, creating an effective tax strategy is essential to the long-term survival of any business, tech startups included. Whether your startup accepts cryptocurrency or not, it’s important to develop an effective tax strategy that ensure your startup isn’t paying more tax than it needs.
By operating your startup as a profitable business from day one and staying on top of the latest cash flow practices and tools, you’ll ensure that your startup is in the best position possible to scale in a sustainable manner.