When most startups are new, financial planning and management tends to be one of the areas that doesn’t receive as much attention as it should. Considering you’re probably swamped with things to do it may seem as though managing the day to day accounts and expenses is something that can wait – but that is rarely the case.
In fact, there are 5 common mistakes startups make early on that often end up throwing their finances into a disarray:
1. Not properly calculating the burn rate
Ideally you should have already calculated your ‘burn rate’, i.e. the amount that you will spend in a month to keep your startup going. Based on this figure you will be able to know how long your capital will last, which is why it is so important. Unfortunately many startups either do not calculate their burn rate, or underestimate their expenses and arrive at an incorrect figure – both of which can cripple their finances in the short term.
2. Expanding quickly without any revenue growth
As a rule of thumb the focus of your startup initially will be to begin to generate revenue and grow that revenue. If you were to expand too quickly then that will pile on your expenses – possibly more than your revenue can sustain. Without properly managed finances it will be impossible to tell exactly how much you can afford to expand, and what areas you can expand into to generate more revenue.
3. Letting debt interest accumulate and spiral out of control
Often startups are funded using business or personal loans, and that debt needs to be managed. If minimum payments aren’t met and the interest on the loans begins to accumulate it will increase your startups expenses very quickly. In some cases it may be best to consolidate debt loans to make them more manageable.
4. Not adjusting forecasts and projections
Early on it is likely that many of your forecasts and projections will be rough estimates, but as your startup progresses you will be able to revise them and make them more accurate. It is important that you adjust your forecasts and projections frequently so that your finances are planned more effectively, otherwise you could end up making decisions based on inaccurate information.
Although initially you will probably be able to get by managing your startups finances yourself, as it grows their complexity will increase. Soon enough you’ll have to handle tax, payrolls, revenue streams and various other areas and that will be difficult if you don’t have the right experience. That is when you should consider hiring a chief financial officer or finance manager – otherwise things may start to slip through the cracks.
Now that you’re aware of the 5 common mistakes that startups tend to make that could affect their finances, try to avoid doing the same. By managing your startup’s finances right from the get go not only will it be in a much better position but you’ll also be able to make better decisions with proper financial information to base them off.