The life of a startup founder is far from easy. You're in charge of the operations, and there are many moving parts that you'll have to have a handle of. For first-time entrepreneurs, it can even be overwhelming--and you’re prone to making financial mistakes.
In this article, we compiled the four common financial traps that new founders fall into, and what you can do to avoid them.
1. Not keeping track of your business finances
When you don’t have a system or a process in place to track your business expenses, there’s no way to know what your current financial situation is. You might not even have an idea what your burn rate is (a.k.a. the amount of capital you spend each month on your operating expenses).
Many startups turn to Xero, Quickbooks or MYOB as a starting point; however bookkeeping and accounting is not as easy as these main accounting software providers make it out to be. With financial intelligence becoming one of the main disciplines required to make a company successful, these early stages are not to be overlooked.
Without this information, you are impeding your ability to reach your milestones or make accurate projections on your business’ performance. In a recent survey of new business owners, about one-third of the respondents reported that they underestimated their monthly recurring expenses. About a fifth of these entrepreneurs did not have enough financing.
When you’re calculating your operational costs, it’s easy to be overly optimistic and underestimate your expenses. Tracking your business expenses will reduce the possibility of miscalculations. It’s also important to prepare projections and forecasts that accurately reflect your business’ current and future performance.
2. Not having a budget -- or ignoring the need for one
When you have limited capital, you need to be strategic in how you manage your startup’s money from the get go. Having a budget (along with a well-thought out business plan) allows you to have a financial roadmap that can inform your decisions around spending and investments.
With a good budget, you can create timelines with realistic projections, allowing you to plan for your next course of action. For example, you can plan for your next funding phase when you reach a particular revenue goal, something that will be difficult to track when you don’t have a solid budget in place.
In this regard, the importance of having good accounting practices cannot be understated. Imagine how impressed investors will be when you have a clear picture of your financials!
3. Not paying attention to cash flow and how it affects your business
Cash management is vital to any business, more so far startups that have limited resources. In fact, one of the most common reasons why startups fail is running out of money. On average, only 1 out of 10 startups succeed, according to the Startup Genome project.
Three-way profit and loss, balance sheet and cash flow forecasting is vital to understand in the early stages. Tools such as Spotlight Reporting and Fathom have increased the availability of this kind of forecasting.
As an entrepreneur, it’s important that you have a realistic and up-to-date forecast for business-critical financial KPIs, such as revenue, expenses, and cash, as well as non financial KPIs such as pipeline value, projects completed in the month, inventory days, and return on capital invested, among others, in order to avoid possible cash flow problems.
Getting your cash burn rate and runway estimates wrong can also spell a disaster in the making. You have to understand your cash conversion cycle. Sometimes, it pays to have a plan on how to manage your operating cash flow even when you encounter issues in billing or client invoicing.
When you’re raising funds, you should have a healthy target of securing at least 12-18 months’ runway before you aim to reach your next milestone. If you fail to secure enough money before you reach a particular milestone, it won’t be appealing to investors.
4. Not considering the full cost of employing staff
Many new startup founders make the mistake of growing their team too fast without considering the actual costs that come with hiring someone full-time.
The excitement of growing a team is infectious; however, hiring rapidly without fully taking into consideration payroll loading costs may lead to disaster.
Gross salary is just one aspect of the cost of employment: you have to consider the overhead costs involved in hiring, recruitment, onboarding (which include payroll loading -- that is, payroll software, annual leave, medical benefits, etc.), and benefits (e.g., sick leave and insurances). Apart from the salary and recruiting costs, you also have to factor in the equipment, supplies, and office space that your new staff needs.
One way to avoid unnecessary expenses and risk that come with growing your team too fast is to study carefully whether there’s a business need for an additional resource.
There are many options available for expanding your team’s capacity, such as outsourcing. For example, you can hire an outsourced team to look after your finance and accounting to save you the hassle of an HR recruitment nightmare.
About Amped HQ
At Amped HQ, we understand how important it is to have an accounting team you can rely on. We keep your books in order and prepare financial statements so you can stay on top of your finances.
Book a discovery call with our team of accounting experts today. Let’s discuss how Amped HQ can help you manage your startup’s accounting tasks better.