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Starting a business isn’t an endeavour one takes lightly. Entrepreneurs often have great ideas, but turning those ideas into viable businesses that generate revenue isn’t as simple as registering a domain name — you need more than just a good idea, product or service — you need the right team (especially in the early days), the right attitude, and, if you’re savvy, the right operational and financial fundamentals.
Ideas that become products or services, a strong team and good attitude are pretty self explanatory, and many entrepreneurs don’t miss a step when finding the perfect combination of these pressing startup ingredients. However, when it comes to the nitty gritty side of operations and financials many entrepreneurs don’t just miss a step, they fall down the whole staircase.
Why is this the case?
One possible reason is that keeping your books and operations tidy isn’t the sexiest side of startups — it doesn’t get the same kind of attention from the media or the community as exciting ideas and innovations do. Entrepreneurs often give this aspect of starting a business less attention when starting out, to their detriment.
But a world-class product or service can only take you so far because a world-class product or service is not a company, it’s a company’s offering, and operations and financials are what affect your ability to sell that offering to both customers and potential investors (especially of the international variety). Now doesn’t that make those just a bit sexy after all?
How sound operational and financial fundamentals help sell to customers
Arguably the most important thing to a company is its customers — without those wonderful entities your product or service is meaningless. Now most startups are happy to have any customers, but what is golden is the ability to identify your most valuable customers so you can sell more to them.
These “most valuable customers” could be those people who buy more of your product or service (in quantity), or maybe they are simple accounts to manage for their ROI. Either way, identifying these individuals — so that you can attract more — and building on existing relationships to retain that constant revenue is key to a startup at any stage.
This is where having sound operational and financial fundamentals can help. The goal is to position these aspects of your business so that you are able to better understand your customers, identify what makes them valuable, pinpoint their buying habits and ultimately enhance their experience with your company’s offering from first contact all the way to post-purchase support.
Importantly, you cannot infringe on any personal data regulations, and must abide to the POPI act — especially in South Africa. This is perhaps most pertinent to ecommerce startups.
Keeping a central record of your customer and sales details can help improve efficiency, stock management, and reduce errors — human or other.
Collecting key data points will also help you identify customer behaviours — this could be done through manually implemented surveys or automatic systems like cookies and website data collection. Having systems in place means that you can keep this data accurate, up-to-date and can easily give key employees access to this information so that they can use it to improve the bottom line — for example, sharing customer behaviour data with sales staff on a central database allows them to be more informed when it comes to making those sales calls.
Having a rigorous financial system in place allows you to not only collect important customer data, but provides a way for you to analyse that data so you can accurately profile your customers. Linking customer records with your accounting system will enable you to see how profitable different customers (or customer sets) are, identifying the most valuable ones.
Depending on what your strategy is, you might need customers who buy often, or those who buy higher-end products, or those who pay invoices quickly, or perhaps those who don’t cancel or amend orders are more valuable to you. Regardless of your needs, having a robust accounting and financial system in place means you will be able to cater to your customers’ needs better, improve their experience, and ultimately improve your offering to keep those customers loyal and happy.
How sound operational and financial fundamentals help sell to investors
Whether you consider yourself a career entrepreneur or are building a business with an exit in mind, there will come the time in your startup’s life when an investment opportunity arises — because whether by design or chance, if you’re building a strong business people will take notice.
So what do you do when that time comes?
You need to be prepared and, most importantly, your financial records need to be in order. The earlier you have implemented an accounting and financial system the more robust your financial records will be. Remember investors don’t want missing information, and they certainly don’t want any nasty surprises otherwise they might not consider investing in you no matter how good your product or service might be.
In general, private companies have a lower quality — or at the least less detailed — financial information than public companies. This increases the risk an investor takes on, so that investor will naturally lower a startup’s valuation if its financial records are not up to scratch.
Public companies have to produce quarterly reports to please external shareholders and investors are more than familiar with these types of reports. Imagine your startup has the quality of financial reports equivalent to a public company — it will go a long way to stand out against other investment opportunities (read: competitors).
Keeping your books correctly, and being as transparent as possible, will make a potential investor’s job as easy as possible to get the information they need to make an investment decision — help them do this and you will lower the risk they take on when investing in your company, this might just well increase your valuation and that’s always a good thing.