7 critical mistakes in startup financials

There are a lot of ways a startup can go wrong– whether it’s bad timing, bad luck, or just a poorly constructed business model. However, recent data shows that 82% of business failures are due to mishandling finances and cash flow issues.

Startups need to closely look into their revenue, expenses, net income, runway, and other finance fundamentals to ensure longevity and growth. The following are seven critical mistakes that typically stand in the way of many startups. Avoid these critical mistakes to dodge serious financial problems that can threaten your business’ survival.

1.   Not paying attention to your burn rate

Your burn rate is how quickly your company spends its cash, and a high burn rate is always a red flag. Unfortunately, a third of business owners tend to underestimate their monthly expenses. Not paying attention to your expenses can cause you to burn cash faster than you imagined. Thus, you need to track your burn rate accordingly and work your way towards actively reducing it and being more strategic about how you maximise your cash reserve.

2.   Not taking advantage of resources

Besides cash, you have a lot of other resources you can maximise to promote positive cash flow. It could be that your human capital is not operating efficiently, your digital resources and software subscriptions could be unused or underutilised, or there are other inefficiencies happening in your operation. Other than your existing resources, there may also be other resources you are not tapping like the help of a financial consultant; the power of social media to market your business; or the advanced technologies that could help your team work faster and easier. The world is filled with resources. All you have to do is identify and make the most of them.

3.   Mixing personal and business finances

This is probably one of the most common mistakes of startups. Not only will it blur the line between your personal and business funds, but it will make bookkeeping and tax preparation more difficult. It’s also likely to ruin your personal credit and open yourself up to an audit. Make sure to keep the personal and business bank accounts separate. It will make accounting and financial reporting so much easier and stress-free.

4.   Expanding too quickly

Growth is always good, but rapid and poorly thought-out growth strategies can just burn your business to the ground. Startups are prone to aggressive and premature scaling which only leads to a disaster. Before expanding, the business model has to be refined and product-market fit, thoroughly tested. Scaling is more than just addition– it’s a gigantic quest that involves setting very clear objectives; developing a strong, capable team; and employing efficient processes that can ensure proper and seamless expansion.

5.   Overdependence on a single revenue stream

The business landscape today is ever-growing and ever-dynamic. Seasonal changes, market changes, and disruptive factors should be expected. If your business is only relying on one source of income, that’s a highly vulnerable position you should get out of. Work towards diversifying revenue streams to safeguard the future of your business. You’re not only protecting your startup against market fluctuations, you’re also expanding its potential for maximum success.

6.   Focusing on the wrong things

A startup founder’s role requires a lot of ‘doing’, but ultimately, one should also invest more time and life force in high-quality ‘thinking’. Take the time to get a bird’s eye view of everything that’s going on. That way, you can better understand what works and what doesn’t in your business. Hone in on the things that are already working, and cut your losses on projects, campaigns, or strategies that no longer look promising. You’ll only harm your finances and your company’s future if you keep bleeding cash on the wrong pursuits, partnerships, or priorities.

7.   Not investing in growth

While you should do what you can to regulate the rate at which you’re spending money. You should also avoid too low of a burn rate that you’re no longer investing in the future and are extensively falling behind the competition. In business, you need to spend money to get more money, and that is by investing in the right growth opportunities– be it marketing, human capital, technology, or research and development.

There are a lot of possible culprits of startup failure, but once you pin down the fundamentals of business finance and get them right, you’re one step further away from the risk of total business collapse. Manage your finances and growth strategies better and you’ll surely hold up just fine.

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