Avoid Fatal Financial Errors in Your Startup
Around 50% of all small businesses don’t make it past their first five years. That’s a sobering statistic, and, to be sure, a depressing way to start a business article. But hey, maybe you can consider it tough love. Because if you’re not made to face up to the harsh facts about the business world, then it just makes it that much more likely that you’ll end up crashing and burning along with the other failed businesses.
The biggest mistakes made here are, of course, financial in nature. A business fails when it can no longer make or keep enough money to support itself. So what are the common errors that startups make? Let’s take a quick look at them.
Not measuring your burn
What exactly is a “burn rate”? This is the amount of capital you go through every month to keep your business above water. About 20-35% of new business owners find themselves severely underestimating their monthly costs on a regular basis. Once you’ve acquired the capital you need to get the business going, you should be carefully tracking your expenses and working out your burn rate with the resulting information. Using this, you can make accurate (though imperfect) projections about the current longevity of your business model.
Investing all your profits back into the business
Otherwise known as going “all in”, it seems like a pretty prudent approach on the surface. Let’s say your startup has a great product and start selling that product really well almost immediately. You’re making a lot of money. You then invest 100% of that money back into the business - getting new employees, upgrading your resources, leasing more office space. Sounds like solid long-term thinking, right? But when you do this, you leave your business (and yourself) without a safety net, a.k.a. a solid cash preserve. If your business starts falling and you don’t have a net, well… it’s a long but speedy way to the bottom.
Sailing without a captain
Bookkeeping can’t be that complicated, right? Why blow money on an outsourcer or a full-time accountant when bank statements make it so easy to track expenses? It’s not that much of a time-consuming activity, anyway. You can get it all done in a few minutes while paying more attention to other business matters. Just simple math, surely? (In case you hadn’t guessed, this is the precise opposite of what you should be saying. If you can’t focus 100% on accounting, then consider working with a CPA firm.)
Hiring the wrong people
Make no mistake: hiring the wrong people is a financial mistake. After all, the most expensive recurring cost you’re going to have is that of your employees. And if you’re wasting money on employees who aren’t experienced and committed to the business, then you’re not going to get a great return on investment. And that’s what employees are - an investment. If you’re hiring a little higher up the chain, then don’t assume that a seasoned corporate mainstay is the right choice - you’ll want to hire people with more experience in recent startups, even if they didn’t turn out to be billion-dollar businesses.