There is nothing more fulfilling than launching your own business. You will not only earn lots of money if your business succeeds; you’ll also be able to provide jobs and meet your consumer needs.
Startups are known for their two key aspects: business innovation and economic growth. They create and launch new products or services each year. On-demand startups are a perfect example of how they can impact the world.
The United States is the leading country for startups with 71,153 businesses, followed by India (13,125) and the United Kingdom (6,220). Statista also reported that 7.1% of the startups cater to the Fintech (Financial technology) industry, followed by Life sciences and healthcare (6.8%), AI (5%), gaming (4.7%), Adtech (3.3%(, and Edtech (2.8%).
But did you know that nine out of ten startups fail according to a recent Failory report? Startup failure reasons include lack of product-market fit (34%), marketing issues (22%), team issues (18%), tech problems (6%), operational problems (2%), and legal issues (2%).
Unsurprisingly, financial problems encountered by startups are a top reason for their demise at 16%. If you don’t properly manage your startup finances, it can be a recipe for business failure. Failed startups should serve as a lesson for every novice entrepreneur looking to launch their business this year.
This article covers financial mistakes every startup must avoid at all costs. Keep on reading to learn more about managing your business finances.
Common Startup Financial Mistakes to Avoid
Launching a startup is no easy feat. Before you start making profits, you should shell out a massive amount of money.
Think of your capital outlay for funding a startup’s fixed assets like the office building, tools and equipment, and delivery vehicles. Consider your expenses for your material acquisition and production as well.
Funding your newly launched business can be costly, even before you start generating income and making profits. Therefore, you should be highly critical in managing your business finances.
Below are financial mistakes you should avoid at all costs:
Mistake #1. Underestimating startup and ongoing operational costs
Did you know that 64% of entrepreneurs reported having unexpected costs in their business? These small business owners had to deal with profit loss, target growth adjustment, and even workforce layoffs. The culprit? They had underestimated business expenses.
It’s crucial for startups to create a list of all expenses for launching a business. Start with Investopedia’s list of typical business startup costs:
- The business plan
- Research expenses
- Borrowing costs
- Insurance, license, and permit fees
- Technological expenses
- Equipment and supply expenditures
- Marketing and advertising costs
Additionally, you should anticipate and identify ongoing expenses that will keep your newly launched business up, running, and fully operational. It’s best to seek appropriate funding to financially prepare for your operating costs, especially for your on-demand startup.
Mistake #2. Making unnecessary purchases or expenses in business
Ideally, it’s best to have a list of startup costs and ongoing operational expenses. Unfortunately, some startups make unnecessary purchases or expenditures in their businesses. They acquire new equipment or invest in the latest technology. They also hire new people or outsource parts of their operations.
The best action is to ask: Are these purchases or expenses necessary? As you plan to grow your startup and make profits, you should be tight on your budget. You can only be lenient on your expenditures once you earn more than you spend.
John Li, Co-Founder & CTO at Fig Loans, suggests getting payday loans for startups or business loans for small companies. “However, use them only for essential business purchases or expenses. In the end, you should be smart in your financial decisions.”
Mistake #3. Acquiring too much debt at the onset
It’s inevitable for businesses not to incur any debt, especially for startups and small businesses. They probably need financing to make their dream business come true. Or they most likely need a loan to fund an unexpected expense like an equipment purchase.
The problem starts if entrepreneurs acquire too much debt. It’s even worse if they get more than they can handle. Unfortunately, this is one big mistake that most startups tend to commit.
Dean Kaplan, CEO of Kaplan Collection Agency, believes that debts should help, not cripple your business. “So before you take the plunge into borrowing money, make sure you really need to do so. More importantly, you can pay them off in the long run.”
Mistake #4. Mispricing products or services
Pricing plays a vital role in business profitability. If you price your products or services too low, you won’t earn that much. If you price them too high, you’ll drive potential customers away.
Unfortunately, some startups make the mistake of mispricing their products or services. It’s best to perform research and due diligence to know the standard market pricing in your location and based on your industry.
Poor pricing can substantially affect your bottom line and overall success. However, pricing your products or services right can lead to a boost in your business profits. You’ll attract, acquire, and win new customers that will help your startup grow and flourish in the long run.
Mistake #5. Not budgeting and saving
Everyone knows the value of budgeting and saving up for financial security and personal success. The simple rule of thumb is to earn more than you spend. This idea applies all the more to business due to its complexity.
Unfortunately, some startups aren’t good at managing their business finances. Some fail at budgeting their expenses well, while others forget to save for rainy days. While easier said than done, budgeting and saving are vital parts of the financial equation.
Brian Dechesare, Founder & CEO of BIWS, suggests working with financial experts. “They can help set your startup finances on the right footing. They can also help build and grow your finances over time. But ultimately, financial success boils down to proper budgeting and saving.”
Mistake #6. No proper bookkeeping and accounting
For the uninitiated, bookkeeping entails recording all the financial transactions. On the other hand, accounting involves managing, analyzing, and reporting business finances. Both are essential for maintaining the financial health of a business.
Some startup entrepreneurs make the mistake of having no proper bookkeeping and accounting. Clutch reports that almost half of small businesses have no accountant or bookkeeper. The same report states that one-fourth of small businesses still record their finances on paper.
Businesses of all sizes should have proper bookkeeping and accounting. Even startup entrepreneurs should have this in mind. It’s best to employ a certified accountant and professional bookkeeper. It also helps to invest in accounting and financial project management tools and software.
Mistake #7. Mixing personal and business bank accounts
No matter how small it is, a startup is a business. You should draw the line between your personal and business finances, even if you’re self-employed.
Unfortunately, some startup entrepreneurs tend to mix their personal and business accounts. Forbes highlights that mixing both leaves a limited audit trail, complicates taxes, and ruins personal credit. It also clouds financial health and pushes investors away due to the lack of financial discipline.
Gates Little, President/CEO of altLINE Sobanco, recommends separating your personal and business finances for your startup. “Doing so gives you a clear picture of your financial health. With a clear picture, you’ll be able to make sound financial decisions.”
Mistake #8. Not researching taxes and their business implications
Tax is part and parcel of life. Once you register your startup for business, you should pay the state as a legal obligation. However, tax can be complicated. In fact, 77% of small business owners report that federal business income taxes are very or somehow cumbersome.
Taxes require financial recording all year round and proper filing during the tax season. If you fail to research the tax requirements, you may pay your taxes incorrectly and delinquently. Such can potentially lead to penalties and even a business shutdown.
It’s crucial to do research on tax requirements and stay compliant with your tax payments all the time. Consider hiring a tax specialist who can do the job for you. A professional can also help lower your taxes and save on your business finances.
Better Financial Decisions for Startup Success
Startups play a vital role in driving innovation and boosting the economy worldwide. Not only do they make the entrepreneurs affluent, but they also provide jobs and satisfy consumer needs.
Launching a startup comes with birth pains. However, sustaining it for the long term can even be more painful. Financial problems may often be a recipe for startup chaos and business failure. Be sure to avoid the financial mistakes discussed above.
Better yet, have robust financial planning, budget and save up, limit debts, price your products or services fairly, set proper accounting and bookkeeping, and manage your taxes well. Ultimately, better financial decisions can lead to your startup’s growth and success.
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