Starting a new company is one of the most rewarding activities that an entrepreneur can be involved in. While there are ample rewards available for the business owner when a new company succeeds, a large number of risks also exist.
It can be very difficult to work out a financial plan and zero in on what everything is going to cost. As a result, many new business owners make some common financial startup mistakes at the very beginning of their new venture.
These mistakes can be serious enough to bankrupt your company early on. This makes it critical to have your finger on the pulse of your business finances from the very start to avoid these five critical mistakes.
Not Having Enough Startup Capital
One of the biggest mistakes that entrepreneurs make is starting out without enough capital. They miscalculate how much startup costs will run, and they get started too early. They don’t allow anything for emergency costs that come up along the way.
It’s always a good idea to dream about the potential of your business and have a positive outlook, but you have to plan ahead for mishaps also. Having more startup capital than you think you need is a good idea. Without enough startup capital in the bank, your efforts could be derailed before you even get started.
Miscalculating Your Cash Burn
One of the most important financial numbers to know in business is your cash burn rate. This is the amount of cash that it takes to keep operating your business on a monthly basis. It’s very easy to miscalculate what you’ll spend on a monthly basis ahead of time.
If you don’t have a good handle on your burn rate, it’s easy to miss milestones and run out of cash too early. Start out with a bottom-up budget using real world variables to get a good handle on what things will cost. That will also give you a much more realistic version of your projected cash burn than doing a top-down analysis.
Making Bad Hiring Decisions
Employees are typically the biggest expense for a startup company and employee costs add up very quickly. You have wages, payroll taxes, health insurance, workman’s compensation, and other direct expenses associated with employees. In addition to the direct costs, there are other costs such as office space, equipment, and other similar items to consider.
One of the biggest mistakes that entrepreneurs make in this vein is to hire too many people too quickly. In the startup phase, it’s in your best interest to get creative with staffing. Look for people with a high upside that can handle many different types of tasks well.
You can also outsource anything that isn’t considered a core competency. For example, most small businesses could outsource their bookkeeping and payroll, since that is not what they specialize in. It’s often much cheaper to outsource this compared to hiring a full-time employee. Most of the time you can get better results as well.
Another way you can save up on overhead expenses is to implement a telecommuting policy which will allow your employees to work remotely. Such working arrangement does have many benefits, but it also has some disadvantages, so consider all the pros and cons before implementing it.
Not Getting Professional Help With Expenses
One of the big mistakes that entrepreneurs make is thinking that they can handle all of the financial matters by themselves. Early on, hiring a CFO probably isn’t in the budget. However, if you’ve closed a seed round of investment, are earning large amounts of revenue or you have massive expenses, you may want to look at hiring a CFO to handle the more complex financial issues that come up
Many accounting firms offer outsourced CFO packages that are combined with bookkeeping and payroll. This may be a great way to fill in the gap of not having a CFO early on, while getting your financial transactions handled at the same time. By doing this, you’ll be able to focus on the important tasks that make up your core business practices.
Not Planning for the Future
Having a solid business plan early on is essential. You need to base your numbers in the plan on real, solid projections and not merely a guess. Start out your business with solid habits such as ensuring the books are clean and correct. Think about the long-term decisions that will affect efficiency. Don’t mortgage the future for a short-term solution.
You should also have some kind of an exit strategy in mind early on. Even if it changes down the line, you will at least have something guiding your decisions now.
Overall, it’s critically important to avoid the common pitfalls that most small business owners face in the startup phase. By making realistic projections of expenses and burn rate, you can ensure you have enough capital before getting started. Keeping your staff small and flexible is also essential during this phase as you can avoid a huge source of cash burn. Getting help from a professional in crafting your long-term business plan is also wise early on in the process. Regardless of the specific steps you take, keep your eyes on the prize while being grounded in reality throughout.
About the Author
Lisa Michaels is a freelance writer, editor and a striving content marketing consultant from Portland. Being self-employed, she does her best to stay on top of the current trends in the business world. Feel free to connect with her on Twitter @LisaBMichaels.