5 ways to manage financial risk at a startup.

May 6, 2010

Of all the things founders worry about when starting a business, losing money is often at the top of the list. Here are a few ways to limit financial risks for yourself, and for your investors:

1. Take a phased approach. Plan your business in time segments, like months or quarters (4 months). Set specific goals for each phase, with budgets, and ways to measure your performance. That way, you can stop every once in a while, take stock of how you are doing, and decide how to proceed—without any nasty financial surprises.

2. Track all expenses. If you don’t measure it, you can’t control it. A simple way to do this is to use a dedicated bank account and credit/debit card, so you’ll have all the numbers in one place.

3. Make sure everyone involved is aware of the risks, and can afford to lose the money they’ve put up. That includes spouses and kids, as well as investors.

4. Keep partners, families and investors up to date on progress and setbacks. Try sending a monthly email report, with information about each important area of the business.

5. Know when to fold ‘em. If things are going poorly, and you really don’t think they’ll turn around, consider exit options that will return at least some of the money put into the business. For example, look for ways to sell off assets, and close up shop while there’s still some cash in the bank.