A startup needing a financial comeback.
It seems a bit counterintuitive.
After all, doesn’t the term “startup” imply that the business is still trying to find its footing, that it has yet to reach a threshold of profitability from which a fall would require a fiscal turnaround.
Not necessarily.
Many startups face unique financial setbacks that they must effectively navigate if they ever want to reach maturity. Overextending themselves during periods of growth. Lagging competition in offerings. Unexpected market shifts.
These types of obstacles can swiftly derail a startup’s fiscal trajectory. With this in mind, keep reading as we dive into some best practices for preparing a startup for a financial comeback!
Know the Key Warning Signs
“Care without candor creates blind spots.”
It is an aphorism commonly used to describe parents’ oblivion to their child’s problem behavior.
It works pretty well for an entrepreneur and their startup, too.
In many cases, business owners just can’t (or don’t want to) be honest about their “baby.” It’s understandable why. It’s hard to be critical of an endeavor that has taken immeasurable amounts of work, sacrifice, and financial investment.
With that said, any entrepreneur serious about a strategic turnaround has to put on the lab coat and examine their company under the microscope. Here are some of the warning signs they should be looking for:
- Consistent decline in revenue or EBITDA
- Liquidity crunch
- Mounting debt and/or missed payments
- Operational inefficiencies
- Leadership gaps and/or high employee turnover
Honesty is always the best policy. Not just as a social norm. But for putting your startup in the best spot for financial remediation.
Do a Hard Reset for Cash Flows
Runway.
It’s the amount of time your business can survive (in months) before it runs out of cash. It is commonly calculated by dividing the firm’s current cash balance by its “burn rate.”
Tighten the clamps on cash runway when getting serious about a fiscal turnaround. Calculate runway on a weekly, not a monthly, basis. Cut out any expenses that don’t directly drive revenue or customer retention. Re-negotiate contracts. Switch to usage-based tools. Delay luxury “nice-to-haves.”
It’s all about survival when mounting a comeback. Make every dollar bill last as long as possible.
Prioritize Your Most Profitable Customers
Not all revenue is equal. Identify which customers or segments deliver the highest margins. Concentrate your energy on these clients. It’s often easier to recover by narrowing focus than by trying to grow everywhere at once.
Get Creative and Spur a Short-Term Revenue Boost
Sometimes, getting into the green is all you need. Do what it takes to get net positive in the short term. Look for fast, realistic wins, such as:
- Upsell or bundle existing offerings
- Offer annual plans with a small discount for upfront cash
- Re-engage past leads or churned customers
These don’t need to scale forever. They just need to stabilize cash now, providing a building block upon which more sustainable processes can take foot.
Consult with a Financial Diligence Firm
Reconcile the register at the end of the night. Balance the checkbook. Pay bills on time. That’s financial due diligence in a nutshell, right?
Far from it.
While these day-to-day best practices certainly don’t hurt, financial diligence is a far more holistic discipline. It is a structured review of the startup’s financial data. It validates strengths. It uncovers risks. It yields actionable advice to inform decisions.
There are the 7 components of the financial diligence process:
- Scope the engagement – formulate key questions and identify areas of concern
- Gather information – compile a comprehensive set of documents and audited financial statements
- Interview management – speak with company leadership to identify off-book dynamics
- Detailed financial review – determine sustainability of earnings by examining 3-5 years of financial documents
- Working capital and EBITDA adjustments – adjust financials to normalize results and provide a clearer picture of future expectations
- Liability, tax, and legal risk review – are there any risks that may require restructuring or forecasting adjustments?
- Reporting – a detailed summary outlining adjusted earnings, working capital insights, risk assessments, and actionable recommendations, giving stakeholders unmatched clarity to proceed with a specific course of action for the startup
As owner of the startup, you undoubtedly have some level of financial acumen. Possibly an MBA. Or many years of experience as a business owner. While performing this kind of diligence may be in your wheelhouse, it is advisable to outsource to a professional consultant. It can be easy to get blinded by the day-to-day grind of operations. A fresh set of eyes is more likely to offer an accurate, unbiased look at your startup’s financial health.
Plan for the Worst, Expect the Best
It isn’t fun to admit, but there could be a time when your pet startup needs a financial reset. Rather than increase debt and hope bad money can fix a worse problem, take a scientific approach to financial troubleshooting and get back in the green quickly. For more of the latest trends in business and entrepreneurship, peruse the content at The Startup Magazine for the leading thought leadership in the industry!
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