The 5 financial mistakes startups make2 March 2016 Category:
Note: This article also appeared in Entrepreneur Middle East, and can be viewed on the site here.
If your credit card bill keeps getting bigger, or the amount you’ve set aside for the month hasn’t quite seen you through, don’t worry – you’re not alone. Although it may be a hard fact to face, many of us are just simply not very good at managing our finances. Despite best-laid plans, calculations don’t always work out, and before you know it you’re wondering why it’s always “month-to-month” with no buffer in sight.
Whether on the personal or business front, the pain of poor financial planning cuts deep. Of course in this article I am going to be talking about the corporate world, specifically with an eye on you startups. As a numbers guy I do love my stats, and one worth referencing is the following from CB Insights: in a study on a large sample of companies, it was found that 29% of failed startups fell short because they ran out of cash (which is the number two most common reason for startup failure).
It goes without saying that cash is the lifeblood of your business. That’s why it’s vital – particularly in the early stages – that you have your finger on the pulse when it comes to the exact state of play of your finances. The old English saying “Look after the pennies and the pounds will look after themselves” could not be more true, and knowing how much money is running through your organisation is key for guiding so many of those business decisions you make in the early years in particular.
Let’s now jump into five of my favourite (as in “favourites to avoid!”) common mistakes that startups make when it comes to managing that precious startup resource called money.
1. Trusting your gut
Ok, I know what you’re thinking, trusting your gut is a huge part of what it is to be an entrepreneur. In many aspects of business, yes. When it comes to finances, er, no way. Don’t assume anything. We have technology at our fingertips that allows us to crunch numbers in just about every possible way, so if you are going off of assumptions you are simply being lazy.
One mistake many first-time business owners make is to believe everything is under control just because those incoming numbers (as in that revenue) look good. But don’t you dare take your eye off just how much is going out. Every startup needs a system in place to track revenue against expenses to project cash flow over the next few months and beyond. In those critical early stages in particular, where profit is barely there – or not there at all – feel free to do this daily, because a cash flow analysis cannot happen often enough during the early startup stages.
A little upfront effort in setting up a cash flow management dashboard has the potential to save you untold headaches further down the line. This can be done using A) Excel or B) some fancy financial planning software. But whatever you choose, just make sure it is not option C), which is not running cash flow at all.
2. Casually adding to fixed costs
In our personal lives, it’s fair to say we’re all guilty of this one. Do you really need the full cable TV package? Did you really need all those optional extras that made the monthly car payment shoot up an extra $300? Probably not. But we get them because, hey, what’s $100 here or $200 there, right?
Seemingly not much on their own, but oh boy how those fixed costs can add up.
This is in fact the downfall of many businesses. A hire made too quickly; too big of an office in the fancy part of town; a flashy company car; designer office chairs that cost almost as much as that flashy company car; and the list goes on.
Many companies wake up one day and suddenly find they have way too high a fixed monthly cost, all because they were far too casual about the way they said “yes” to new things. In this case the owners are simply not “losing enough sleep” over the thought of running into financial trouble. Well guess what, losing sleep over the prospect of running into financial problems is a lot better than losing sleep over actual financial problems.
The bottom line: When it is time to review something and make a call on whether to add it to fixed costs or not, I want your answer to be “no” far more than “yes”.
Many companies wake up one day and suddenly find they have way too high a fixed monthly cost, all because they were far too casual about the way they said “yes” to new things.
3. Thinking things will just get better
Sometimes – despite your perfect efforts at running the business – things just go wrong. It could be the loss of a client, missing out on a big pitch, or even an economic downturn. If your company is visited by any of these unfortunate events, know the difference between reacting too quickly and delaying the inevitable.
Sure, you don’t want to cut back on the team at the first sign of trouble. Rather, you want to review the situation with a cool head, taking a hard look at the numbers. Keeping a close eye on things for a while to see how they pan out before taking the tough decisions is not the worst idea in the world.
But – and this is a big old but – if things don’t start showing signs of improvement relatively quickly, it’s time to pull the trigger on any savings that can be made (a list of which you no doubt already made and have handy in your breast pocket at any given time).
Cost cutbacks are never easy, whether it’s downsizing your office or laying off staff or getting rid of that company car, but making them as soon as possible can mean the difference between keeping your business healthy during the hard times versus slowly sinking into debt as you sail up said creek towards bankruptcy without a paddle.
4. Relying on others to keep an eye on your finances
Now I am most definitely not saying don’t trust your head of finance – hey, I am one of those heads after all – but by no means should you be leaving the financials to someone else without even so much as a cursory glance. You don’t need to spend hours and hours trawling through transactions (though it may pay to do so during those early startup stages); rather, I am saying look carefully over your financial reports to make sure you have a clear and thorough understanding of the financial state of your business.
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?
Yes, all of those sound great, and I am sure you will come up with more things you will want to see on a regular basis. And if you give it some thought, you will see that it is all very much based on common sense and that reviewing the figures is something that can happen in minutes.
The simple fact is this: as an entrepreneur, the buck stops with you. Don’t go looking to chop off the head of your finance person if he or she has been giving you information that you have chosen not to look at before making decisions. And I have to say here that I am literally amazed at how often business owners are doing this wrong. Don’t believe me? Let’s get a stat on it then: research by the accountancy software firm, CCH, and information services group, Wolters Kluwer, found that 35% of small businesses fail due to insufficient time spent managing the books.
So please, pretty please, believe me when I say that when it comes to the finances, it pays to be a control freak.
Don’t go looking to chop off the head of your finance person if he or she has been giving you information that you have chosen not to look at before making decisions.
5. Not setting clear goals
I’m not a huge one for business mantras, but there is one that I think really stacks up: “What gets measured gets done.” 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 organisation 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.
And reviewing the success of all of this then helps determine your next set of goals, which in turn affect your next set of decisions. And the cycle goes on.
Just remember: set realistic targets and you’ll soon find yourself hitting them. Set unrealistic ones and it is all cake and ice cream until the results show you’ve fallen well short.
Getting it right
The stats tell us that around half of all small businesses don’t make it past the first five years, and financial mistakes have a huge part to play here. Whether it is overestimating sales, underestimating costs, relying too heavily on credit to get you off the ground, or just plain careless financial management, there are plenty of pitfalls waiting to trip up the unsuspecting entrepreneur.
Now I know this is all much easier said than done. With so many balls to juggle at any given time, it’s easy for entrepreneurs to spread themselves so thin and not give the necessary diligence to each and every task. But while I am here to tell you that you can often get away with not giving that exceptional level of diligence to certain startup tasks, when it comes to startup finances, your exceptional diligence is indeed required.