When you start a startup company, money can be tight, and it is important that you have a plan in place from the very beginning to ensure that you remain fiscally responsible with your finance plans, particularly during the very beginning. Unfortunately, most startups that run into financial problems do so because they do not practice proper financial planning and accounting, and as a result end up making some very serious financing mistakes that can lead to the downfall of a once promising business. Five of the most common financing mistakes that are made by startups include:
Not Budgeting For Operating Costs. One of the most common mistakes made by startup companies is not doing enough planning for operating costs. Many new businesses get ahead of themselves, planning their advertising costs and other more glamorous expenses while overlooking the basic operating costs that determine whether or not their business will even be viable in the long term. Make sure that, if anything, you overestimate the amount of money you will be spending on day to day operating costs, because underestimating those costs could be very detrimental to your business.
Overcharging Or Undercharging. Another common mistake that is made by many startup companies is pricing their services or products far too high, or far too low. Ideally, every startup company should have done enough market research to know the perfect price for their items, but that is not always possible for a company that is working with extremely limited funding. Setting your price too high or too low, in the very beginning will stick with those that come across your service. If you have to drastically raise your prices, they will be less likely to buy knowing that they had a better deal on the table previously. If you lower your prices drastically, consumers will likely feel like they do not know what your service or product is truly worth.
Finding The Right Salary Amounts. In the beginning, many startup companies refrain from paying themselves or many of their founders a salary so that all of the revenue that the company generates can be invested back into the company. But everyone needs money for day to day expenses, and finding the right amount to pay everyone can be difficult. Figure out what your startup will require in terms of operating costs and investment expenses, and pay yourself a reasonable salary based on those numbers. Try to pay fairly based on the amount of work that is done. Pay yourself and other employees enough to live on, but not as much as your business can afford.
Forgetting a Rainy Day Fund. Every business will eventually run into a situation that requires making a large, unexpected investment in order to keep things running smoothly. This is especially important during the startup phase. What if the software that your company uses to manage day to day operations encounters a serious, unexpected bug? Or if you have to invest a large amount of money in manufacturing in order to meet your first big order from a new client? Make sure that you have funds set aside for these types of situations and can cover large unexpected costs with as little interference in day to day operations as possible.
Hiring the Wrong People. When your business is on a strict budget, you have to look at where you can cut costs whenever possible. The simplest way to get the most out of every dollar you spend is to ensure that you hire the right people. Find people that excel in what they do, or are able to cover multiple roles under a single salary. Hire people that are as invested in the success of the startup as you are, and not people that are just looking for a paycheck.
Author Bio: Stevie Clapton works for FastCash.org who provide financial advice and online personal short term loans.
“Poor Or Rich Directions” image courtesy of Stuart Miles / FreeDigitalPhotos.net