It is no longer news that most start-ups fail in their first few years. Research has proven that small businesses have an average life span of 4 years. While there are many challenges such as the location within which the business is founded, financial constraints, and more, that impair the chances of a business succeeding, there are certain failures that arise solely because of the mistakes made by those who run or manage these start-ups.
It could be in the way processes are managed, client or customer acquisition methods, the quality of the product or service delivered by the company, and so on. However, most of the early-stage mistakes revolve around how business owners manage their financial resources. That is, business owners/entrepreneurs make a lot of money mistakes. To avoid these mistakes, the first step is to know them. Here are a few of the common money mistakes business owners make and how they can be better managed.
1. Not having a budget or financial plan
The budget is a system of checks and balances that ensures you are focused on meeting the company’s goals and measures your attainment along the way. Not analysing and planning your business can result in having unrealistic expectations that could adversely impact your company and could drive away potential investors or business partners.
Setting time aside to gather input from different people and functions within the organisation and aligning your business plan with your business model, roadmap and go-to-market plan can significantly increase your chances of success.
Having a clear budget serves as a guide as to how the start-up is going to make money (generate revenue) and how it is going to spend money (relevant cost of production or administrative expenses). The unit economics of the business model; when the business will breakeven as well as when and how the business will achieve its strategic financial milestones. Not having this can have you caught unawares as a business owner as you might soon not be able to manage operations effectively.
2. Not determining the business’ burn rate
The burn rate is the rate at which a new company spends its initial capital. It, therefore, has to do with the amount of capital a business needs to keep it running over a specified period. The inability of a business owner to determine the burn rate of a business could impact on the ability of the business to achieve relevant milestones before it runs out.
Most business owners around the globe cannot ascertain and underestimate the monthly expenses of their businesses. Similarly, almost 20% of new business owners realised at some point in their journey that they do not have enough money to continue their journey. It is very easy for small businesses to miscalculate their operational costs, resulting in inaccuracies of initial financial assumptions.
A major way to avoid this miscalculation is to keep track of all of the business expenses. Creating a bottom-up projection based on real-world assumptions is also a great way to manage the cash flow of a business as opposed to a top-down approach which could make entrepreneurs overly optimistic about their expected revenue. In simpler terms, know how much you need and how much your business is capable of making to cover those needs.
3. Financial management without training
Managing finances is a skill that we all need, but one we can’t all effectively do by ourselves and many business owners are not aware of this. Having someone with sound financial skills on board (either as an employee or a part-time consultant) is often not a priority for many businesses until it is too late. So many businesses face problems down the road for failing to set the proper foundations for of good financial framework and practices in the early days.
Moreover, the more a business owner delays in dealing with this, the harder and more expensive it may become to resolve. While there is no need for a small business to hire a full-time accountant and CFO, these functions can be outsourced, allowing the business get the needed support, benefiting from the wealth of knowledge and experience of experts while still keeping cost low.
Having a trusted finance person that can go beyond the basic accounting transactions be very beneficial. Great financial support could include laying out the financial framework; keeping the books clean; maintaining a well organised and timely reporting system; providing timely information on the health and prospects of the business; scrutinising overly-ambitious sales targets; designing strategic plans, as well as engaging and facilitating fundraising and exit plans.
There are so many financial mistakes that can sink start-ups and small businesses. One of the ways to mitigate these financial risks is to seek professional advice and involve finance experts in the early stages of the business that will offer relevant guidance.