Congratulations! You’ve started your own company. This is an exciting time, but it’s important not to let that excitement derail your business before it has a chance to succeed. One surefire way for that to happen is to make financial mistakes. Sometimes, eager startup founders overextend themselves financially. Then, unfortunately, they spend more time worrying about keeping the company afloat than seeing their idea to fruition.
This does not have to happen to you. If you start your business with a firm grasp on potential costs and you don’t spend money unnecessarily, you can sidestep some of the pitfalls that have doomed many startups before you. Here are six financial mistakes to avoid with your startup.
Mistake #1: Miscalculating Your Burn Rate
Not calculating your cash burn at all is another mistake that falls into this category. Let’s start at the beginning though and define a cash burn rate. This is how much money you use each month to keep your company going. If you don’t have a handle on this, you could end run out of funds before you accomplish anything.
This might seem like a simple misstep to avoid. However, surveys reveal that almost a third of new business owners admit they’ve underestimated their startups’ monthly expenses. The main reason is their operating cost estimates aren’t correct. Avoid this mistake by factoring both fixed and variable expenses into your company’s monthly operating costs.
Mistake #2: Growing Your Company Too Quickly
When you start a business, you want as much help as possible. It can get tiresome wearing so many hats, but from a financial standpoint, it’s your best bet until you can start generating revenue. Employees’ salaries really eat into your bottom line. If you bring on too many people prematurely, your funds will evaporate that much faster.
It might be painful to multi-task and work longer hours at first. However, it’ll be more painful if you hire too many people in the beginning and have to shut down the company or lay them off. Instead, hire gradually; as revenue grows, then grow your staff.
Mistake #3: Waiting for the Big Payoff
The term “angel investor” crops up a lot in startup circles. Your company might even land one at some point, but don’t let that hope prevent you doing other things to earn revenue. When you start your business, work as if a big investment is never going to come. Put your focus on making your company valuable—create a great product and provide outstanding customer service. You will build a good foundation, which not only will help you earn more money, but it might also draw the attention of those angel investors you’ve heard so much about.
Mistake #4: Taking on Too Much Overhead
One of the biggest financial drains on a startup (or any company) is unsold inventory sitting on the shelves. You’ve already paid for it and it holds no value until it’s sold. Be confident in your product, but also be realistic. Start with a smaller order and make sure you can sell all of it first. Remember you can always order more product if it flies off the shelves. It’s much harder, impossible really, to try to return your unsold product back to the manufacturer.
Mistake #5: Overlooking Hidden Operation Costs
You probably have a grasp of the obvious costs like employee salaries and office space. But remember other costs like permits or insurance. How about “down the road” costs like equipment repairs or upgrades? It can be easy to forget about these lesser-known costs when you’re thinking about big picture stuff, but when it comes to your startup’s finances, everything that costs money is important. So, make a checklist of every possible expense. Or, use some of your startup funds to hire a professional to help you make sure you have everything possible expense accounted for.
Mistake #6: Not Preparing a Budget
It’s great if you have a grasp on all of your operating costs. It’s another thing to know you can afford them. A list of operating costs does not mean as much if you don’t have them all budgeted. As you go through your expenses, do it with how much money your startup has in the bank in mind. That is the time to start crossing items off of the list that you can’t afford, not after you’ve committed to the expense and realize there’s not enough capital available to pay for it. Creating a budget will also help you prioritize which expenses are crucial, and which ones can wait until the company has more disposable cash.