Starting A Small Business? Here Are The Top Financial Mistakes To Avoid When Starting Your Business

Starting a new business can be an exciting time, but it can also be full of obstacles. If an entrepreneur does not prepare to face the challenges they will meet along the way, their startup could end up among the 80% of startups that fail.

However, the failure of many businesses is caused by common, avoidable mistakes. Startups can avoid these mistakes with a few simple strategies.  

Having a strong business plan ensures startups are prepared

Before a startup is even launched, the business owner should have a clear business and marketing plan. Without an idea of their goals for the business’s survival and growth, a business owner will waste their time (and money) stalling and stagnating. Companies can learn and grow from failure, but hitting a plateau is one of the hardest things for a business to overcome. Once a business reaches this point of aimlessness, they’re on the track for failure.

The easiest pitfall for a startup is spending too much money while not having enough coming in. Startups tend to think that, because their business is new, they must offer their product or service at a reduced price before they become established. However, businesses need to value themselves properly. If a company spends more to provide its product or service than they are making by selling it, its model is unsustainable, and the business will be unable to survive for more than a few months.  

What startups need to protect themselves

The reason startups typically go out of business is because they run out of money. To prevent this you need to start with a financial plan.

A well-crafted financial model is a numerical representation of your business plan. Where will you spend your marketing dollars and resources? How will you gain customers? What is the expected revenue stream from such customers? What is the cost related to the product or services provided? What overhead is required to support such operations? Thoughtfully thinking this through is the first step to building a successful business. It’s likely that the first iteration of your financial model will be inaccurate and there will be deviations in its practical execution. The point of having the model is to have a reference point that allows you to assess where your assumptions may have been off. It provides a baseline to continue to refine your business model.

The second thing that startups need is financial monitoring because a company will go out of business when it runs out of money. Therefore, it is important to continuously monitor the performance of the business on a monthly basis. This provides a feedback loop to revise the forecast, which provides a view on what your cash burn is and what your corresponding runway looks like. If you are a profitable business, it provides early warning signs of deteriorating growth, margins, etc. — which allows the management team to course-correct in a timely manner.

In 2022, we have observed that the days of easy money are gone. Companies are moving away from the “growth at all cost” mantra and applying far more financial discipline to their financial operations. This discipline is crucial in building an organization that can survive the ups and downs of an economic cycle.