Whether on the personal or business front, the pain of poor financial planning cuts deep. Creating a financial plan and managing finances can be challenging. But it is essential that you understand the importance of accurate financials—both for your own stability and ability to plan, as well as to convince and assure potential investors of the validity of your business and actual investors that you’re not wasting their capital.
Here are 6 Common mistakes that startups make when it comes to managing that precious startup resource called money,
1. Miscalculating (or not calculating) your 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 your burn rate, you are seriously hindering your ability to achieve your milestones before your money runs out. According to some recent surveys of new business owners, approximately one third admitted to underestimating monthly expenses. Along the same lines, almost 20% of new business owners realized that they didn’t have enough financing. It’s all too easy to miscalculate your operational costs, which leads to your initial financial assumptions being off. Keeping good track of all of your startup expenses can help.
2. Hiring inexperienced people
As you build your team, look for experts who have been in and understand the startup world. If you come across someone you’re not sure about, offer them a temporary contract or one-time project as a trial. This way, you can determine if you can count on them and avoid the costly mistake of having to constantly find and train new employees.
3. Going about product development the wrong way
For many entrepreneurs, their idea is their baby. In their eyes, the idea is perfect just as it is and all they need to do is nourish it so it can reach fruition. One problem: entrepreneurs are not the target audience of their company. In fact, in most cases, you’re one of the last people who should be determining what the end product will look like. Because if that’s how you choose to develop your product, chances are you’ll dump the majority of your money into something no one but you appreciates.
4. Relying on others to keep an eye on your finances
If financials really aren’t your thing, then ask your financial mastermind to deliver them to you in an easy-to-understand format. And yes, you can define that format. What do you need to see? Cash in the bank? Invoices out? Projected revenue for the months ahead as well as fixed and variable cost projections? A cash flow projection for one month, two months, and three months?
5. Not having a financial mentor
It is widely known that new entrepreneurs should find a mentor. Every CEO has someone they can talk to about the ups and downs of running a new company, someone who helps them make the tough decisions. This same adage goes for keeping your money organized.
Don’t do it alone. Many fall into the trap of thinking that they need have to “have money” to work with an advisor. Wrong. Financial firms like ours work with clients at each stage of the game.
6. Not setting clear goals
In terms of the success of your business, your financial goals are in many ways a measure of exactly how well you expect to be doing. By setting clear and realistic financial goals over a determined period – monthly, quarterly, yearly, etc. – you give everyone in your organization something to aim for, and you give yourself a framework in which to operate and make some of those very important growth-management decisions.
This includes “all things numbers,” and it affects what you will spend on marketing, which may be based on how much return you expect it to deliver in the form of new leads for your sales team, which in turn affects whether you will give the green light to your sales head to make that extra sales hire, the success of all of which makes it easier for you to decide how much to invest in R&D, and so on.