Written by Autumn Dugloz | Factor Finders
Starting a successful business is a fiercely challenging undertaking— so challenging, in fact, that 90% of startup companies fail.
Not surprisingly, financial misfortune is the leading cause of startup failure. 29% of failed entrepreneurs cite “running out of cash” as a figurative “cause of death” in their business post-mortems. So, what are the most common financial mistakes that startup company owners commit? How can such errors be prevented? Check out this list of the five most common financial mistakes that entrepreneurs make.
Many budding entrepreneurs are tempted to price their products and services in accordance to the amount necessary to drive a profit after adding up their costs—however, while this may intuitively seem like a sound approach, it may be too simplistic.
It is not enough to price your merchandise in regards to your firm’s individual costs. Successful startups conduct extensive market research and gather a sense of their product/service’s true market value. In other words, make sure that you base your prices on market value—not your profit aspirations
Misjudging Startup Costs
Every entrepreneur knows that starting a business is no cheap date, but very few know exactly how expensive the figurative “bill” is going to be.
There is no exact science to estimating your startup costs down to the last dollar—but there are ways that you can predict a ballpark figure and plan accordingly. Do some calculations, double check your math and then prepare a budget that has some extra funds set aside for unanticipated expenses. They always arise.
Forgetting to Budget your Salary
Believe it or not, but many entrepreneurs forget to (or opt not to) pay themselves.
It is a logical measure to resort to, in the short run—when you are a penny-pinching startup company owner, it is easy to overlook your own personal income and instead invest every available dollar in your operations. But as the CEO of your small company, you need a salary. Even if it is nothing extravagant, it is important that you budget for your personal earnings from the get-go. You won’t be able to run your business for long if you don’t have an income.
Not Taking Advantage of Tax Breaks
Every startup business owner needs to be savvy with the U.S. corporate tax code—and if not, they need to have a keen accountant.
Startup costs are tax deductible, and startup costs are very loosely defined. Market research costs, training new staff, legal fees, establishing vendors, etc. — you name it, and you can declare it as a startup cost, so long as it legitimately is applied to kick start your business.
Running Out of Working Capital
Just as startup costs are difficult to project, so too are operating costs. As mentioned earlier, of the 90% of startup businesses that fail, 29% mentioned that they simply “ran out of cash.” They couldn’t keep up with operating costs.
Keeping a healthy cash flow is immensely difficult. If you turn to bank loans for your startup funding, then you need to be sure to keep a hefty chunk of your loan for anticipated future operating costs. As long as your calculations hold accurate, you should be okay taking this route. But, more than likely, you will not be able to budget well for future operating costs (again, how can you possibly know how much it is going to cost to run your business in six months when you haven’t even opened your doors yet?). For on-the-fly funding, you can reach out to non-bank lenders or, if you prefer to avoid debt, you can factor your accounts receivable to achieve a reliable source of working capital.
It is hard to start a small business. It can be done, though, if you keep good records, plan prudently and avoid the five aforementioned financial blunders. Learn from the mistakes of the thousands of failed businesses before you, and ensure that your startup company is among the ten percent that survive.