Worst financial mistakes startups can make

Nowadays, we have more freedom to pursue our own ideas and passions and make money out of them. More and more people start their own businesses, and we often observe their evolution by asking ourselves why some of them became successful in spite of difficulties, and others not?

Or maybe we are the ones who dream about starting a business and would like to assure ourselves that we do the right moves and avoid the most common and dangerous mistakes made by business owners, mistakes like these:

Their business model is incomplete

No matter how great the business idea and how optimistic the entrepreneur, the business model should be like a firm foundation, able to resist any weather changes that appear on the market. Often, in the awe of the early stages, business owners fail to consider possible risks.

In order to achieve this, it is important to create several versions of the business model: the optimistic, the realistic, and the pessimistic one. We agree in this matter with John Jay, an American politician from 19th Century who wrote, citing an old English proverb “To hope for the best and prepare for the worst, is a trite but a good maxim.”

They lack a coherent business plan

Lack of planning is one of the main cause of failure in business. Actually, it is the root cause for all the other arising problems. To exemplify the magnitude of the risk that business owners take when not elaborating a strong enough plan, ask yourself if you would trust going on the board of a plane, if you would find out that the pilot doesn’t know exactly where the plane should fly? The answer is obvious.

Investing too much

In the beginning stages of small or medium businesses, many entrepreneurs, even the experienced ones, give into the temptation of investing as much as possible towards the launch. For example, they buy the best and the most expensive equipment and materials or invest too much in glamorous events and direct advertising. However, such an approach can be harmful, leading to financial losses that can be hard to recuperate from.

Mixing personal and business finances

This is another common mistake that business owners make. It is important to know that the money for the business and the money for personal leisure or family expenses are not the same. You can allow yourself to spend only the money from your own salary. Otherwise, the presence of any extra money in your pocket is a 100% unplanned overspending, that in time will lead to a negative profit.

They have no safety net

Many financial advisers stress the importance of having at least some savings for unexpected events. This measure of safety will provide business owners multiple benefits: it will protect them when financial surprises arise and it will also allow them to take measured risks in the process of learning and discovering new things that can contribute to the growth of the company.

Therefore, business owners should pay off their line of credit at least once a year (or more), reduce their number of guarantees (starting by refusing to sign any new vendor or supplier guarantees), and also to hold at least three months of operating costs in a reserve. The latter can be achieved by adding the business emergency fund (let’s say 5% of your monthly income) to the monthly operating costs, just like any other bill. Follow these steps, and watch your business thrive.

Not using a customized accounting software

Many businesses don’t use a personalized accounting software. Why? Because every business has specific needs and goals, and the software they use should adapt to them, contributing to the process of reducing the cost of human resources and increasing overall productivity. The software businesses use should also be appropriate for their specific industry and should be simple to use by non-accountants, so you should develop a custom accounting software that suits your specific needs as soon as your startup grows big enough.

We trust that by following our recommendations and by avoiding these common mistakes your business will have a solid enough foundation for its growth and will be protected against the many risks that befall such fledgling enterprises.

Johnny Magnusson CC0 1.0 Universal (CC0 1.0) Public Domain Dedication

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