As an entrepreneur you’re busy working every day to find your way, build products or services, grow your company and achieve goals. Unless you’re a financial whiz, it’s not easy to also work out your financial plan and pin down precise numbers; sometimes important financial details can fall by the wayside.
Even if you are a financial guru, creating a financial plan and managing your finances can be challenging. But accurate financials are essential — both for your own stability and ability to plan, and to convince and assure potential investors of the validity of your business.
We’ve all been there. It is easy to make financial mistakes. However, once you recognize potential missteps, you can take steps to avoid them. Here are the top five financial mistakes startups make and how to steer clear of them:
Miscalculating or Ignoring Cash Burn
Your burn rate is the amount of capital you go through every month to keep your business running. If you don’t have a good understanding of this metric, you will hinder your ability to achieve milestones before money runs out.
According to Hiscox’s survey of new business owners, approximately one-third are underestimating monthly expenses (32%). Along the same lines, many business owners realize they didn’t have enough startup financing. It’s easy to miscalculate operational costs, so initial financial forecasts are often wrong. Keeping track of all of startup expenses will minimize these miscalculations.
The first step in managing cash flow is to create a bottom-up projection, using real-world variables. Top-down forecasting can lead entrepreneurs to be overly optimistic about sales and revenue. Bottom-up forecasting gives you a realistic (albeit less inspirational) gauge of how much money you’ll need to get going — and keep going. Re-forecasting is also key. Account for fixed and variable costs and continually make projections that accurately reflect the actual state of your business.
Not Understanding Your Market
If you don’t properly understand your market, you will price products and services incorrectly. Don’t merely add costs and calculate the margin you’d like to make. Consider your market position and value. Start with price and work backwards. In your calculations, keep the marketplace in mind: Who is your customer? What need does your company fulfill? What do you have to offer? Who is your competition? What trends affect your market, and how?
Scaling Too Fast
One of the greatest business expenses is people. To keep costs low, consider ways to save money on staffing. Most importantly, don’t hire too quickly. Having too many employees is a huge drain on funds. In addition to recruitment and salary costs, there are additional physical costs including larger office space, equipment and supplies. There’s also the psychological cost: What will happen to these people if your company doesn’t grow and you need to lay them off? Don’t forget the reputation cost as well. How will it look to investors if you have to disassemble your team? Instead, hire slowly.
Making Bad Hires
Another key to saving on staffing costs is to hire potential as opposed to experience. Don’t waste money hiring experience just for the sake of it. And, whenever possible, outsource non-core competencies. For example, outsourcing financial support frees up time to focus on other aspects of your business.
Doing Your Own Finances (Without Training)
If you’ve closed a seed round of funding, have a lot of expenses, and/or are earning real revenue, you need a CFO to help manage finances on a strategic level. If you don’t yet have a lot of financial activity, you may not be in need of CFO services. But, at the very least, you need financial support with day-to-day accounting and bookkeeping. Honestly, it will cost you more in the long run to do your own finances rather than hiring a professional from the get-go.
This article has been edited and condensed.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides early-stage companies with day-to-day transactional accounting, CFO service, tax, and valuation services and support. He’s a financial expert and startup mentor whose passion is helping businesses focus on what they do best. A version of this post originally appeared on the author’s blog. Connect with @EarlyGrowthFS on Twitter.
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