Financial mistakes could spell doom for startups. Adequate financial comfort projects the startup in positive light when pitching for funds. Startups will benefit from steering clear of these financial mistakes that can become roadblocks to success:
1. Not having a realistic financial plan with clear goals
Startups will benefit from developing business plans and budgets by being mindful of expenses from across organizational functions. A budget based on realistic expectations improves financial discipline, keeps the company grounded and gives a clear roadmap for growth.
2. Lack of focus on a profitable model
A profitable and sustainable business model should be put in place early on in the startup’s life cycle. Acquiring new customers without ensuring that each sale covers the costs and offers a healthy margin only adds to losses and questions the sustainability of the business.
3. Not prioritizing the finance function
Not prioritizing the finance function can be a costly mistake for startups. It is important to ensure accurate accounting and bookkeeping. Access to CFO-level skills is crucial for startups with a lot of financial activity. Leaving financial management to experts allows startups to make informed and intelligent business decisions.
4. Improper cash management
Cash management is particularly critical for startups as they require funding for each milestone. It is important to accurately estimate the cash burn and runway so that profits and cash flow are maintained. Improper cash management can result in good profitability according to the books, but not adequate positive cash flows to pay off bills. Using a cash flow analysis system to track revenue against expenses and correctly project future cash flows is vital for a startup.
5. Undercapitalizing the business
Underestimating the time and capital required until break-even may lead to a premature closure of a startup. Correctly estimating funding needs and having a viable fundraising plan is critical to recover sunk costs and meet expenses until cash flows become positive.
6. Not allocating sufficient emergency funds
It is important for a startup to plan for the unforeseen and put away money to cover at least three months of expenses while the cash is coming in. As it is possible for a certain revenue stream to suddenly run dry, a safety net of reserve funds can help navigate a rough patch in business.
7. Overspending against the budget
Frugality and avoiding unnecessary cash burn can go a long way in the financial health of the startup. It is better to defer big ticket purchases in the absence of adequate cash flow if they do not help generate revenue in the short-term.
8. Going overboard with hiring
Over-hiring can be a huge drain in terms of salary costs, office space and equipment, and the psychological costs of layoffs. For startups, it is a smarter option to hire slow as they grow. Starting with a small team, outsourcing non-core competencies, and onboarding on a part-time and need basis are great strategies for keeping hiring costs in check.
9. Not being adaptive to changes
There is no set formula to success when it comes to revenue models. Taking fast decisions with adaptability to rapidly change if one revenue model is not working for the business to the next suitable model will yield better results and sustainability in the long run.
In summary, financial prudence is fundamental to the success of a startup. Planning budgets, having an emergency fund, tracking expenses, and securing professional advice to mitigate financial risks are vital for the sustenance and flourishing ability of a new business.