How to solve the financial management dilemma in the early stage of starting a business for college students

Reflecting on his tumultuous six years in entrepreneurship, 24-year-old Li Hao from Wuhan still feels a sense of trepidation.

Li, who operates in the e-commerce sector, saw an opportunity in the burgeoning short-video marketing trend during his junior year of college. He teamed up with several classmates to sell kitchen and household goods, and in just three months, they racked up over 10 million yuan in online sales. At the peak of their success, he even hired more than 30 people.

However, the good fortune was short-lived. Mismanagement of finances led to internal conflicts within the team, and with intensifying competition in the industry, the core team fell apart. Out of seven partners, only two remained, prompting Li to pivot his business model and seek new partnerships in Zhongshan, Guangdong, before returning to Wuhan to start fresh.

Wuhan is home to over 1.3 million college students and boasts a robust transportation and logistics network, making it a hub for student entrepreneurs riding the wave of China’s innovation-driven development strategy.

Recently, reporters from China Youth Daily have been exploring various student entrepreneurial teams in Wuhan, discovering that Li’s experience is not an isolated incident. Many startup firms fail to establish proper financial management systems, leading to confusion between personal and corporate accounts. Some teams lack effective financial oversight and legal awareness, leaving them vulnerable to temptations that could lead to embezzlement. Additionally, the struggles to align equity incentives with personal relationships pose significant challenges for young entrepreneurs fresh out of school.

“Always ready for a ‘fight,’ I never thought about managing finances,” Li recalls. As a graduate of a private college, he started his own company in his freshman year, focusing on campus promotional activities for internet firms, generating nearly one million yuan in revenue over two years alongside a group of students.

Like many entrepreneurs, Li initially had little understanding of finance and didn’t implement any financial regulations or hire professional accountants. Most of the revenue passed through personal accounts, making audit trails complicated and prone to errors.

“There was so much urgency to keep moving forward that I didn’t consider financial oversight important. I figured it was better to focus on securing more business to keep the team alive,” Li explained.

In an attempt to simplify financial processes, Li devised a basic system of separating money and accounts—assigning one person to handle money and another to manage bookkeeping. Yet, confusion persisted because both were partners and not dedicated financial professionals, leading to frequent mistakes in accounting.

Once, after discovering discrepancies between their accounts, several partners spent an entire night reconciling the figures, only to find that their camaraderie had significantly diminished in the aftermath.

Many other student entrepreneurs shared with reporters that in their early stages, they preferred to invest heavily in market development rather than on financial management.

“The cost of hiring a full-time accountant is too high,” Li pointed out. For instance, in Wuhan, hiring a full-time accountant costs around 8,000 yuan a month, while outsourcing to an accounting firm can be managed for about 4,000 yuan annually. “We focused on big-picture finances and neglected the smaller transactions, which became a common approach among many startups.”

But does outsourcing finances truly alleviate the burden?

Interviews with several accounting firms revealed that they primarily handle bookkeeping and tax filings based on the documents provided by the clients and do not participate in the operational management of the businesses. Issues arose from improper documentation or missing invoices, often leading to mistakes in the financial records.

Wang Jie, a clinical medicine postgraduate from Wuhan University, launched a health education platform with classmates after graduation, which now boasts over 270 million followers online. Wang’s team initially engaged an accounting firm, but since their income was low, they didn’t encounter significant issues. However, having a core founder with some financial knowledge from his previous work in an insurance company proved beneficial. After a year of growth, they hired two financial positions and ultimately expanded to five dedicated accounting professionals to ensure stable financial operations.

Financial management is a meticulous task and a critical component of business success. Even seasoned entrepreneurs can find themselves overwhelmed when it comes to managing finances. Wang Qi, an 85-born graduate from North China University of Water Resources and Electric Power, served as Chief Engineer for a large enterprise before starting a high-tech company for construction site digital management in Wuhan in 2018.

Wang had no professional training in finance and, in 2020, mistakenly undertook a project for a state-owned enterprise without proper budgeting, resulting in wasted resources and delayed timelines, ultimately leading to no profit from the project.

“I essentialized technology in my startup journey, pouring all my time and energy into R&D and business expansion. However, lacking financial management knowledge beforehand and the energy to manage it afterward could create a time bomb for our company’s growth,” Wang lamented.

In contrast to Li, fellow 90s entrepreneur Deng Yuan faced greater losses. While in college, he started a campus recruitment fair company with a high school friend. Their collaboration generated over 7 million yuan in revenue during the fall of 2018 alone. Deng trusted his partner with the finances, which were often handled through personal accounts due to on-site transactions with hiring companies.

One day, while reconciling accounts, Deng discovered a discrepancy of over 2 million yuan. Confronting his partner led to revelations that they had misappropriated the funds for personal use, sparking conflicts that ultimately dismantled their once-tight friendship.

In the world of entrepreneurship, handling finances is inevitable. Many student entrepreneurs, inexperienced in financial management, can easily lose their way in the face of significant monetary temptations, sometimes finding themselves in legal disputes.

One publicized case involved a graduate student from a prestigious university in Central China who co-founded a jewelry company but embezzled over 560,000 yuan of company funds for personal use during his time as a general manager and finance supervisor. His peers had placed great trust in him, failing to exercise oversight. The shocking betrayal resulted in severe repercussions for both the individual and the team’s cohesion.

This pattern resonates with many in the entrepreneurial community, highlighting the need for vigilance and proper financial management systems among young startup founders.

As the experiences of Li Hao, Wu Jie, and others reveal, solid financial oversight is foundational for any startup’s sustainability. While financial education exists in many universities, issues persist, often stemming from a lack of real-world application and understanding.

A dedicated entrepreneurial support platform recently launched in Hubei province, aiming to provide tailored financial management training to student entrepreneurs. The platform emphasizes the importance of identifying mentors who can highlight potential financial pitfalls while helping startups establish foundational financial structures.

Li Qingyuan, a renowned educator specializing in finance, stresses, “Understanding the significance of financial management is crucial. It is not merely about recording transactions but about leveraging high-quality financial information to enhance resource efficiency and support sound business decisions.”

In his reflections, a prominent entrepreneur who began his career in Wuhan shared a cautionary tale about failing to discuss equity allocations openly among friends. This led to operational inefficiencies and ultimately the closure of their venture.

Zhou Cheng, a graduate entrepreneur from China University of Geosciences, shared sentiments about how equity distribution often results in conflicts among partners. He noted that despite intentions for fairness, averaging allocations could sow discord as profit distribution based on initial equity arrangements often leads to dissatisfaction and disputes.

More stories from student entrepreneurs illustrate the crucial role of effective partnerships and financial literacy, urging a collective shift toward structured approaches to financial management in their ventures. Consistent mentorship and proactive financial oversight can help navigate pitfalls and keep entrepreneurial dreams alive.

(Note: The names Li Hao, Wu Jie, Wang Qi, Deng Yuan, Zhou Cheng, and He Hui are pseudonyms.)