Smart finance for startups: 6 mistakes you can’t afford to make

Article | March 14, 2024

Authored by Weinlander Fitzhugh

Starting a business is an exciting whirlwind. Fueled by ideas and high energy, you might feel like the possibilities are endless. But transforming that dream into a sustainable, profitable venture is where the real challenge lies. 

In the rush of launching your startup, it’s easy to overlook certain financial details. Yet, those numbers, budgets, and forecasts are the backbone of your business. Whether you’re new to the startup world or a seasoned entrepreneur, your success will hinge on your ability to sidestep common financial mistakes. 

Today, we’ll look at six common financial mistakes you’ll want to avoid to ensure your business succeeds and thrives.

Mistake 1: Creating a solution before identifying problems

Many entrepreneurs have great ideas for products and services. But, the foundation of a successful business isn’t just a great idea; it’s understanding the problem that your product or service solves. 

For your concept to sell, it needs to resonate with the needs of your potential customers. You must understand their challenges, their pain points, and how your offering can make a difference in their lives.

Let’s look at a real-world example to illustrate this point: Google Glass. Despite its cool features and innovative technology, it struggled in the market partially because it failed to address a clear problem. Consumers found it interesting but not essential. They couldn’t see how it solved a specific issue in their lives. 

Contrast this with Amazon Go, a store that had a clear understanding of its target market’s pain points. These stores did away with cashiers, lines, and waiting, enabling customers to grab what they needed and leave. The customer’s account would be charged automatically, and they’d receive an emailed receipt. The whole concept was born by solving a universal problem – nobody likes to wait, and convenience is king. In fact, Harvard Business Review found that customer satisfaction drops if customers have to wait any more than 2 minutes. Amazon banked on this fact and has gradually been adding Go stores throughout the US and UK. 

Invest time and resources into understanding the problem you’re solving before you invest in development. That’s the foundation of a sustainable business. 

Mistake 2: Unrealistic forecasting

It’s crucial to develop a reasonable financial forecast, whether you’re trying to raise capital or financing the business on your own. The key to realistic forecasting is a flexible model that allows you to change inputs and test different scenarios to see how they affect your outcomes.

Think of your forecast as a financial roadmap – it should include income statements, balance sheets, and cash flow statements. The ability to tweak assumptions like customer acquisition costs or sales projections can help you anticipate different business conditions. For example, you might test a scenario where expenses double or you only reach half of your expected revenue. These “what-ifs” help you prepare for both good times and bad.

Many startups create optimistic forecasts, especially when they need to impress potential investors. It’s important to balance these forecasts with more conservative scenarios. By stress-testing your assumptions, you’ll be better positioned to handle unexpected turns.

This is where the expertise of a seasoned business advisor can really make a difference. They can help you identify your business’s key drivers, create realistic assumptions, and develop a forecasting model that adapts to any situation. 

Mistake 3: Inadequate fundraising and over-reliance on a single funding source

While it may seem straightforward, failing to raise enough capital or relying too much on one source of funding can have dire consequences. It’s not just about securing enough financial runway; it’s about understanding the timeline to break even and diversifying your funding sources. 

First, consider your break-even point. You should have a clear roadmap of how and when your business will start generating a profit. One common pitfall is underestimating the time and resources necessary to reach this milestone, which can lead to running out of money prematurely. Prepare for both unexpected costs and potential revenue shortfalls. Always aim to raise more capital than you think is necessary, and have a backup plan to cushion your business against unforeseen financial challenges.

This brings us to our next point: diversify your funding sources. Over-reliance on a single investor or funding channel is risky. It exposes your business to volatility and external control. Multiple funding or income streams give you options and help to negotiate competitive terms.  

Mistake 4: Not achieving the right product/market fit

Achieving the right product-market fit is an iterative process. As you introduce early versions of your product to your target market, it will likely be a close, but not perfect, match to your customer’s needs. The key is to actively seek feedback from your early adopters and continuously refine your product based on their input.

You’ll reach a turning point when your product aligns well with the needs of your market, creating a great customer experience. This is the true product-market fit, where organic growth begins to take off through word of mouth, PR, and other non-paid channels. This is critical to scaling your business while maintaining or lowering your average cost of acquiring a customer.

A mistake many companies make is aggressively marketing their product before achieving any sort of product-market fit. Driven by the pressure to generate sales, entrepreneurs invest heavily in marketing, which might stimulate sales but often leads to high customer drop-off rates. It’s akin to trying to fill a leaky bucket.

The lesson here is to focus on improving your product-market fit before scaling up your marketing efforts. This approach ensures that when you do invest in marketing, it’s more likely to yield sustainable growth and customer retention. 

Mistake 5: Premature hiring or poor staffing choices

Running a business, especially in its early stages, can be overwhelming. It’s tempting to think that hiring employees will solve your problems, but employees are a significant financial commitment. 

Before rushing into hiring, consider alternative solutions like outsourcing specific tasks. In the digital age, it’s easier than ever to find external professionals such as CPAs, bookkeepers, virtual receptionists, programmers, or marketing consultants who can provide the necessary support without the complexities of managing full-time employees. 

Once your business reaches a stage where hiring becomes necessary, remember this principle: hire slow, fire fast. Many startups do the opposite, hiring quickly and hesitating to let go of underperforming employees, which is costly and detrimental. 

If you need to hire, take the time to ensure that the new hire is not only skilled but a good fit for your company culture. Have a clear plan in place for their role and responsibilities. Ensure you can afford the full cost of an employee, which goes beyond salary to include payroll taxes, unemployment insurance, office space, parking, and possibly more, depending on the location of your business and your circumstances. 

And then there’s the “fire fast” part. It may sound harsh, but it’s practical. An employee who isn’t delivering the expected return on investment, be it in financial terms or in terms of easing your workload, can be a liability. Poor performers can hurt your bottom line and your corporate culture. Retaining these employees can weaken morale among other employees who may feel burdened or demotivated working alongside underperforming colleagues. Prolonging the decision to terminate poor performers only increases your losses. 

Mistake 6: Neglecting tax obligations

Taxes for a startup are like routine maintenance for a vehicle; neglect them, and you risk a breakdown. You need to be diligent about various tax obligations, including payroll taxes, sales tax, and possibly corporate income tax, among others.

Some taxes, like payroll, require withholding and must be remitted throughout the year. If you fail to withhold the right amount or you fall behind on payments, the penalties and interest add up quickly. 

It’s crucial to ensure your taxes are paid in full and on time. Likewise, tax funds shouldn’t be diverted to cover other corporate expenses or deficits. This error can lead to severe financial and possibly even legal repercussions. 

This is one reason it’s crucial to maintain regular appointments with a CPA. They can clarify any tax obligations specific to your business, including those you might not be aware of, so you can steer clear of costly penalties. 

You may also consider outsourcing some of these responsibilities, like payroll, to a specialized provider. This not only reduces the time burden for you, but it can also mitigate risks and liability. 

Wrapping up

Remember, knowledge is your most valuable asset when managing a startup. If you’re looking to deepen your understanding or need tailored advice for your startup journey, our team of seasoned advisors is here to help. Together, we can help to ensure that your startup doesn’t fall victim to any of these mistakes. For more information, please contact our office.