6 Financial Mistakes Startups Make

When it comes to business, it is much easier to spend money than to earn it. Likewise, bringing a company to financial ruin takes significantly less time than it does to build one up. Although we like to envision that any venture can last forever, it often isn't so in reality. A healthier approach is to think of companies like they are going through stages of development. There will be hurdles and pitfalls along the way, but also ways to get over and around them. In this article, we will be focusing on new companies, and the top 6 financial mistakes startups make.

The Philosophy of startups

By their very nature, startups come with certain built-in traits, and we could say that those features are neither intrinsically good nor bad. Once we scratch a little under the surface, we can also notice similar problems that keep emerging in most startups. It’s to be expected, so don’t panic. Of course, there are trends that change from year to year, but the core stays pretty much the same. Common issues will plague the same design philosophy that is ingrained in this type of business. This isn’t to say that startups are bad or that they should be avoided. On the contrary, it’s only human to look for patterns and to learn from them. After all, the goal is to learn what the most common financial mistakes startups make are and how to go about avoiding them.

Most startups have the following traits:

●      A small number of employees. Startups are often created by a solo founder or a small group of people.

●      They are focused on a single product or service. The idea is to offer a single product or service or a new solution to an existing problem or need. Services or products provided by startups are often based on technology and online trends.

●      They are intended to grow. Due to their tech-based approach, the service being offered is intended to scale. Along with the product, the company is also intended to expand well beyond the lone founder.

●      They are on the lookout for investors and capital. It often takes a lot of time to be able to deliver a viable prototype. Both initial seed money is required, as well as later series of funding rounds.

It is good to keep these traits in mind. They will help remind you of where your startup came from, and that often helps to know where you are going. Of course, there are many ways to give your startup a competitive edge, but we will primarily focus on the blunders.

The top 6 financial mistakes startups make

More than 90% of all startups will fail. Out of those that failed - 29% were due to funding and cash problems. Small businesses fail all the time, but many of the reasons that cause them to crash and burn can be avoided.

Here are the 6 most common financial mistakes startups make:

1.  Mixing personal and business accounts

Since startups often originate from a solo founder, it is pretty easy to mix up business and personal finances. After all, it’s just you there. Even so, it is good to keep the lines clear. Once more people start coming into the company, you will have huge problems if those lines are blurry.

2.     Unnecessary purchases

These are most common in the very beginning. You want everything to be new and shiny, so you are more likely to go on a shopping spree. Spending far too much isn't a problem only for laptops and software licenses. Renting expensive office space will burn through your budget like nothing else. Even in the still-recovering coronavirus world, it is good to have office space. However, since many people are working from home, location has become more important than the property itself. For example, Florida's startup rate is growing, and particularly South Florida is becoming a hotspot for startups. Do some research on prime locations and consider setting up your business where other IT talent is congregating. It's much more important than fancy furniture.

Spending money, especially in the early stages, can often be internally justified as investing in your business. Don't fall for this trap, and avoid as many big purchases as you can get away with. Instead of purchasing software, try to find free alternatives. Learn to make do with the bare necessities.

3.  Confusing work with productivity

Your enthusiasm might be unlimited, but your energy and time are not. There is a limited amount of hours you can dedicate to work each week. When you hire employees, this issue only gets exacerbated. The people working for you will require wages, and be sure that the tasks you delegate to them are relevant to developing your product. Don't' go off on tangents and constantly dream up more features. The idea isn't to work yourself or others to the brink of exhaustion. Instead, try to work efficiently – it's much more cost-effective.

4.  Diversifying too much

Remember that startups initially focus on only one product or service. Expanding quickly sounds like you are living the dream. Just be careful that you don't spread out too thin. You need to have a stable income and a minimum viable product before your company takes on new challenges.

5.  Throwing money at marketing

Sure, you need to get the word out, and that costs money. Taking an al dente approach and just throwing money at marketing to see what sticks is expensive. It is also a sign that you should change your marketing strategy. Instead, we recommend you start small. Perhaps use a digital form for advertising where it will be simple to track the return on investment of your marketing budget.

6.  Not saving for a rainy day

Every company will have times when things are going well. There are also those times when the opposite is true, and it's essential to have enough money to outlast them. A general rule is that you should have at least three months worth of expenses saved away. COVID-19 taught us the importance of having emergency funds at the ready. We won't be forgetting that lesson anytime soon.

As you can see, the most common 6 financial mistakes startups make almost seem evident and easy to avoid. Yet many people get caught up in the idea that you need to spend money to make money. While certain costs are hard to avoid, it doesn't hurt to cut down where you can and learn from others' mistakes.

Meta Description: Are you launching a new startup? Money can often be an issue. Here are the top 6 financial mistakes startups make and how to avoid them.