NOM helps entrepreneurs finance innovations. Innovation is wonderful, but certainly not easy! Unfortunately, we still see many innovations and startups fail prematurely. This can have various causes, but a common reason is that the money runs out too early. By being smart with your finances for innovation, you can avoid many problems. In this blog, we provide ten tips to help you spend your budget as effectively and efficiently as possible.
Finance and innovation: what's involved?
There is a lot involved in developing an innovative idea into a commercial product. You will have to perform market validations and develop a proof-of-concept and prototypes. For that, you'll need (production) facilities, resources and people. And unfortunately, there is no set route to reach your goal. It is a learning process in which you will have to test, experiment, evaluate and adapt. Innovating takes time and money, all before you can expect your first sales! It is therefore incredibly important to spend your financial resources as efficiently as possible. This is especially true for startups, because they have not yet built up any assets.
Financial plan and forecast
When you start innovating, there will be all kinds of costs that will come your way. You will have to think carefully about what you are going to invest in, how much you can and should spend, how much reserves you will need, and how and when you will eventually recoup the costs. If you don't understand your cash flows, sooner or later you will run into trouble.
It is incredibly important to know how much money you have to spend each month, and how much reserve you need for unforeseen expenses. For example, if sales take longer than budgeted (something that happens very often). With a solid financial plan, budget and forecast, you keep control. A forecast should preferably be based on three scenarios: a worst-case, base-case and best-case scenario.
10 tips for your finances in innovation
The following tips can help you make the best use of your financial resources and avoid problems. These tips are based on what we ourselves often encounter in practice.
1. Do not spend more than necessary
It may sound like an open door, yet this often goes wrong. It may seem that a certain investment is necessary, but is it really? Turn over every euro and think three times before you spend it. Especially in the early stages of your startup or innovation, minimizing costs is the key to success!
But surely market validations and prototypes also cost money, you may think. True, and these are indispensable steps in the innovation process. Yet I often see entrepreneurs spending more than strictly necessary. Usually because they want to make the test product as perfect as possible right from the start. My advice is to always go for an MVP, or Minimal Viable Product. This "minimum workable product" makes the essence of your solution clear with as little cost as possible.
In short, with as little investment as possible and as early as possible, try to assess whether your innovation is going to succeed!
2. Compare suppliers and alternative options
Compare different options and suppliers with each purchase. So that you can be sure you have the most economically advantageous offer. A purchase does not always have to be expensive, often there are cheaper alternatives available. For example, consider so-called "freemium" apps or software instead of purchasing expensive IT systems. In terms of marketing, for example, it is smart to consider how you can get publicity for your product as cheaply as possible. Consider free publicity in regional newspapers or a business contest. Journalists are often open to great stories about innovative startups. With a little inventiveness, more is often possible than you think.
3. Know the return on your investment
Also very important: know what each investment will get you. Because, "if you pay peanuts, you get monkeys." In other words, what is your return on investment? Also consider the possible risks and payback period of an investment. Only then can you properly weigh up whether the investment is really worth it. So think carefully about the output of your investment. For example, a website can cost a thousand euros, but it can also cost ten times as much. Then you must be able to distinguish between a must-have and a nice-to-have. The returns do not always have to be expressed in money. An investment can also yield other benefits. Some investments are simply necessary to take the next step in your innovation process.
4. Deal frugally with your team and management
A good team is an important condition for success. But again, determine carefully what you really need. When deploying staff, focus on your core business. That way you avoid large overhead costs. Above all, see what you can do yourself, but use your time efficiently. Do not be tempted to occupy yourself with peripheral issues or to spend a lot of time on things that someone else does faster and better. Finally, management (relatively expensive) should also be commensurate with the size of your team and the work and activities. Be critical of your management fees; you want to keep these in balance, too! After all, you are an entrepreneur and not an appointed manager. And an entrepreneur also bears risk.
5. Be flexible in your costs
Scalability and flexibility in your cost structure are hugely important. You will face setbacks and unexpected situations no matter what. Anticipate these. Especially novice entrepreneurs and startups are often too optimistic about expected sales. It often turns out that it takes longer before your product is ready for the market and you can expect the first revenues. So make sure your financial buffer is large enough to absorb these setbacks. And that you can flexibly cut costs if necessary.
For example, weigh what you really need to buy yourself and what you can hire. If you don't travel much, then public transportation or a shared car is probably more attractive than a leased car. Do you really need that expensive, private office space? Or can you also work from home or rent a flex space? And do you need to hire someone for certain tasks, or can you hire a freelancer for a few hours every now and then? Also deal with your inventory as flexibly and efficiently as possible, because inventory also costs money.
6. Consider the stage of your business
When you start a business or start innovating, you go through several phases. It starts with a research phase and ends with the growth phase of your business. For each stage, you will need different goals and therefore different resources. Decide what the intended result of each phase is and what you need to achieve it. This way you spend your financial resources as efficiently as possible. You will then avoid wasting money on things that do not suit your business at that moment. For example, don't start investing a lot of money in marketing and sales before you have found a good product-market-fit and your sales process is well put together.
7. Keep continuous overview
Having a good overview of your finances at all times is absolutely essential. Know what your team spends hours on, where your finances go and what it generates. Of course, you can enlist the help of an account or outside consultant to do this. But I would definitely recommend gaining the necessary financial knowledge yourself. That way you are not completely dependent on an external party to know how you are doing financially. Moreover, this will also save you money.
8. Create financial reports
Good reports help you maintain financial overview. So you can make adjustments in time if necessary. Draw up a standard report with which you can quickly see what you have realized in comparison with your budget. By looking back at the results achieved at least once a month, you can identify bottlenecks and areas for improvement in time and make adjustments quickly. In this way, you keep control of your financial resources and can continue to spend them as effectively as possible.
9. Measure results with KPIs
Establishing critical performance indicators (KPIs) helps you measure results. With them, you can measure and analyze changes. It is very important that they are formulated SMART, that is, specific, measurable, acceptable, realistic and time-bound.
There are an awful lot of things you can measure. Which KPIs make sense depends on your business activity, revenue model and what stage your business is in. Sprout has published a handy infographic with 34 metrics for startups.
Of course, measuring for the sake of measuring is not enough. Work the KPIs into your reporting and think carefully about how you can steer them and what you can influence. KPIs are not an end in themselves but a means to achieve your goals and make the right decisions. A good tool to help you with this is the build-measure-learn feedback loop, a model from the Lean Startup method. This allows you to learn quickly from your mistakes and make timely adjustments.
10. Be realistic and adapt!
And finally, ambitions are wonderful, but also be realistic. It is tempting to put your heart and soul - and perhaps all your money - into your venture. But keep in mind that your innovation may not be a success. And the more you invest, the harder it is to stop at the right time or adjust your plans. Successful entrepreneurs are not afraid to change their plans, or to quit an innovation at the right time. No matter how difficult that sometimes is.
Want to know more?
Do you have your own plans to innovate with your business and just want to spar? Then get in touch with Kyra Weaver. I would love to help you get started!
Want to know more about innovating and funding for innovations? Then download our free white paper "From innovative idea to commercial product.
In this white paper you will learn:
- What the innovation process looks like and what challenges you face along the way
- What opportunities there are to fund this early stage of your idea/product
- In what ways NOM as an investor can help you
Please note that this whitepaper is only available in Dutch at the moment. We are in the process of translating this whitepaper.