7 common financial mistakes startups make
It is common knowledge that most startups don’t even survive the first year since their opening. While there may be several reasons for that, perhaps the most obvious and fatal are the financial mistakes new entrepreneurs make.
Mistake 1: Not separating business and personal accounts
Not only is it harder to keep track of your accounts this way, but it will likely trouble you with your taxes as well. Separate accounts will allow you to see the business’ financial position at any given time without having to calculate it from your personal expenses.
Mistake 2: Huge initial purchases
When you start a business, it can be too tempting to purchase the best software, hire highly skilled staff, or spend a large sum on the perfect website. It’s easier to fall into that rabbit hole than one might think. Think over your purchases. Ask yourself, how is this expense going to help generate more revenue? If the answer is “it can’t”, then drop it.
Mistake 3: No backup plan
When you first start earning a profit, it’s tempting to just invest all of it. You may be excusing your actions with the fantasy of fast growth. However, it is crucial to save up for emergencies. What if the market takes a nosedive, as many industries have during this unprecedented pandemic? You never know what’s going to happen, but it helps to be prepared for it.
Mistake 4: Not budgeting
Startup founders often go headfirst into initiating their business without an adequate amount of planning. This is one of the main reasons such businesses fail so quickly. To take the first step towards profitability, you need to make budgets and plan adequately, instead of spending everything at the same time
Mistake 5: Being too optimistic
Optimism is necessary as an entrepreneur - how else are you going to bear with crushing losses? However, it is equally vital to keep your optimism in check. Assuming that everything is going to be alright, that you’ll get the hang of it soon, without actually planning and working for it, is not going to help.
Mistake 6: Not setting up proper accounting systems
As the founder of the business, there are only so many skills you may have. Maybe finance is not your forte. But that’s not reason enough to completely ignore the importance of accounting. Not only can proper accounting systems show you where your money is going, but they also save you from future legal problems as well.
Mistake 7: Relying on your intuition
Listening to your gut is perfectly acceptable - particularly as an entrepreneur who has to take regular risks. However, financial matters are where you should draw the line for that. For finances, a systematic and well-planned out approach is one that will bring you the best return.
Such mistakes are common, but keep in mind that they are not entirely unavoidable. Knowing these mistakes and recognizing them in your own business is a start. Remember, it is much easier to lose money than it is to earn it.