7 Common Money Mistakes That Startups Make
Updated: Jul 18
Smart financial management is essential for all businesses. However, it can be difficult to get it right, especially during the startup stage.
Poor financial planning the most common cause of startup failure, so the sooner you take ownership of your finances the better. Dealing with your finances right from the start is the best way to set yourself up for lasting success. Careful planning not only helps you to avoid common money mistakes, it also shows potential investors that you’re serious.
Here are 7 common financial mistakes that that startups tend to make:
1. Miscalculating Cashflow
Whilst following your gut can be a good principle, it’s dangerous to make assumptions about your finances. To keep your business afloat, you need to know exactly how much cash your business burns through each month.
It’s vital that you meticulously track your revenue and expenses and create a cashflow projection for the months ahead. Underestimating your cash situation could land your business in hot water. During the startup stage, an Excel spreadsheet may suffice but be prepared to upgrade to bookkeeping software later on.
2. DIY Accounting
Most small businesses try to save money at the start but make sure that you’re saving in the right areas. Managing your accounts by yourself may be OK for the initial setup of your business, but it’s wise to hire a professional as early as possible.
Juggling self-taught accounting with running a small business will eventually result in a backlog of errors, which can prove costly. If you engage the right professionals, they will save you time, money and stress, allowing you to focus on growth, or even helping you to develop your growth plans. The right accountant is an investment not an expense.
3. Failing to Set Financial Priorities
As a business owner or director, you are responsible for steering your new business to profitability. You can only do that if you have a carefully planned budget.
A clear budget lets you to set goals and priorities and installs financial discipline. It will also help you to reassess your finances and make good business decisions should a particular project need more money.
4. Poor Record-Keeping
The importance of balancing bank statements and keeping receipts in order cannot be overstated. Poor bookkeeping can cause chaos to your business and result in a lot of trouble, not to mention wasted hours trying to resolve problems. Keeping all of your receipts and cross-referencing your accounts with your bank statements is vital for transparency and future success.
5. Misunderstanding The Market
For your business to be successful, you need to understand what your customers need. Knowing your target market helps you to know how to position your product/service, how to reach your audience and how to price appropriately. Here are some questions to consider:
- What is your market position?
- What need do you fulfil for your customers?
- How much value do your products or services provide?
- Who is your competition - and what makes you stand out?
Miscalculating prices can prove to be an expensive error for a small business, but knowing your market well will help you to figure things out.
6. Hiring Quantity Over Quality
Over hiring or hiring people with the wrong skill-set or who don’t fit with your company culture is a huge waste of money. Poor hiring and firing decisions can damage morale and productivity, and financially cripple your business. In order to save a lot of trouble and money later on:
- Don’t rush the hiring process.
- Seek advice from an HR consultant before you hire.
- Make sure that you have the right processes in place.
- Take time to recruit the right people at the right time.
7. Failing to Save
It has always been good practice to estimate your tax bill and to put money aside so you can cover your tax obligations.
However, it also makes good financial sense, once your business starts to make enough money, to put some aside as a contingency fund. If Covid has taught us anything, it’s that we need to plan for the unexpected and have some money set aside to help in the tough times.
Most financial planners advise to keep at least three months' worth of expenses in an emergency or contingency fund for both business and personal expenses.
The reality is that if a business runs out of money it will go bust. However, with careful planning, you can anticipate cashflow problems and prepare for them before they endanger your company.
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Rebecca Webster, Electric Accountancy founder
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