8 Biggest Financial Mistakes Startups Make

Posted by Adam Haider on Mar 08, 2021 08:08: AM
Adam Haider

Starting a business comes with several risks and is fiercely challenging, most of which can seriously impact your finances. Also, startups tend to look for every opportunity to push the boundaries and discover new things. However, their willingness to take chances daily makes them more likely to make mistakes. 

Some failures and mistakes are minor and can be corrected quickly. But some, especially those that concern money, can quickly burn the house down. It's a significant reason why within their first few years of operation, most startups fail. An unexpectedly drying up cash flow, a massive unforeseen expense, or a quickly growing amount of debt have been known to bring even the most promising new companies to their knees.

Here is a look at the biggest financial mistakes startups make, along with how you can avoid them:

 

Mistake #1: Failing To Analyse Cash Flow

One of the most critical aspects of financial management is cash flow forecasting, but it can be overwhelming for many business owners. Several businesses fail because of issues with cash flow. Cash flow doesn't just mean the flow of money that is coming in and out. It also encompasses timing and liquidity.

How To Avoid It

Organisations tend to underestimate the occurrence and impact of adverse events, making it challenging to recognise and prepare for future "worst-case" scenarios. It would be helpful if you plan what-if scenarios regularly to prepare for future positive and negative outcomes. Experience and thorough research can be used to back up predictions.

Keep track of your investments as well. You can't be prepared for the future if you don't keep track of them or manage them. Cash flow planning makes it easier for you to break down revenues and expenses into recurring and one-time payments. It is essential to write everything down. 

When it comes to expenses, concentrate on those with a long-term effect and those relevant to the company's day-to-day activities. Rents, telephones, and internet connection fees are only a few examples. If you have colleagues, don't forget the expected payroll and bonus expenses in your cash flow plan. Maintain a balance in your account equal to at least two months' worth of operating expenses.

You can also use applications like Wally+ to help you manage your finances. Wally+ enables you to track your budget, and it can set budgets to control your day-to-day spending across categories like groceries, entertainment, home, and more.

Mistake #2: Immediately Making Big Purchases to business

It's understandable to want the best products and the most talented people when starting a new business.

However, if you're itching to make big purchases (even if they sound like investments) at the start of your business, think it through carefully. It would help if you watched out for overspending. 

Depending on the type of business you're starting, some expenses, such as building a website or attending an industry trade show, will be required. Still, you should always ask yourself if the expense in question will help you generate more revenue in the short term.

How To Avoid It

Decide what startup expenses are essential. Decide what you need to run your business well and get rid of the rest. Cutting costs will allow you to save much money on non-essential items while also allowing your business to grow faster. 

Also, make a budget for the future. Decide how much you can spend on your needs annually and stick to it.

Mistake #3: Not completely understanding your marketplace

You may be guilty of mispricing your products/services if you don't properly understand your market.

How To Avoid It

Don't just add up your costs and find out how much of a profit margin you'd like to make. Consider your market position and the value you offer; start with the price and work backwards. Keep returning to the marketplace in your calculations: who is your client, what need does your product/service serve, what do you have to give, who is your competition, and what developments could impact your market—and how.

Mistake #4: Not Saving for Lean Times and Emergencies

Several people will advise you to keep big savings accounts on hand due to unexpected expenses or emergencies. There will be times when something unforeseen occurs, and using your credit card to cover the expense is a shortsighted approach that only leads to further issues down the road.

How To Avoid It

Most financial advisors recommend entrepreneurs to maintain at least two or three months' worth of expenses in a contingency fund or an emergency for both business and personal expenses.

Mistake #5: Getting into too much debt early on

It's not a good idea for a startup to go into debt before it even gets off the ground. The more you need to get positive cash flow, the more debt you can accumulate.

How To Avoid It

The golden rule for startup capital is not to waste money. If you take on much debt (as most new businesses do), that means you probably don't make the required income to maintain your company. Spend money only on the things that will benefit your company. It would help if you also track costs so that you know where your money is going.

Mistake #6: Not Taking Advantage of Tax Breaks

When you're first starting in business, the last thing you want to be concerned about is how much of your profit will be lost to taxes at the end of the year (or the end of the quarter). However, paying taxes is an unavoidable part of doing business. Even though this isn't the most glamorous aspect of entrepreneurship, it's still important to understand.

How To Avoid It

Every startup business owner should be familiar with the tax code, and if they aren't, they should employ a professional accountant. Startup costs are tax-free, and the word "startup costs" is loosely defined. Market research costs, new employee training, legal fees, establishing suppliers, etc. — you can assert it as a startup expense as long as it is used to launch your company legally.

Mistake #7: Not Setting a Clear Budget for Your Business

You may be able to run your company without a clear plan for the future if worst comes to worst, but you would have a challenging time succeeding without at least a rough budget to help direct what you can and can not afford to spend on each month.

How to Avoid It

You need to guide your new company toward sustainability, which you can only do if you have a well-thought-out budget for operational, marketing, and other costs. A well-defined budget encourages financial discipline and clarifies the path to business growth.

Mistake #8: Failing To Consult Financial Professionals

The success of any business depends on how it manages its finances. Financial planning involves having clear goals and developing a strategy for using available resources in the best possible way to achieve those goals. It ensures that you don't just meet your short-term goals – those related to cash flow and profits, but also long-term goals of growth and expansion.

Many entrepreneurs think they alone can handle their organisation's financial issues, saving the costs of hiring a finance team. The truth is, finance is a tricky area and one that requires expert advice to succeed. That's where the role of a financial advisor comes into play.

How To Avoid It

Non executive-directors or mentors have the expertise and experience to provide sound financial advice, handle your taxes, and optimise maximum investment returns. You can acquire knowledge of financial matters, but you still can not match a specialist's expertise. This is because they have undergone thorough training and have years of experience working with several clients.

Their experience is valuable. They will review the business processes and procedures and make suggestions for changes based on industry best practices. They will ensure that the resources are not mismanaged and that you use them to achieve full returns.

Summary

While a single bad financial decision can bring an organisation to fail, it is often the result of a series of bad decisions and financial miscalculations. You will prevent these mistakes by paying more attention to your personal and company cash flow during the year. You can also seek professional advice and try to bring in finance experts early on.

Take the time to carefully measure every money you spend, and always make sure you have the right funds in place to keep growing.