Like a lot of hopeful entrepreneurs, you might have a dream of reclining behind some massive oak desk at the top of a skyscraper, relaxing while your trusted higher-ups take care of everything. Unfortunately, this isn’t going to land in your lap! When you’re setting up your business, you’ll have countless important decisions which you’ll need to deal with. Proper management of your finances is dry, but essential. After all, the common thread between all businesses is that they generate money! To ensure your business doesn’t fail before it properly takes off, here are some big financial mistakes which you need to avoid.
Before your company starts trading, you’ll need to go through a period of fundraising to get the whole operation off the ground. If you’ve already spoken to lenders and drafted a cash flow forecast, then this might sound like one of the simpler tasks of starting your business. However, your initial fundraising is the first place where you can run into financial pitfalls that will weaken your business indefinitely. Obviously, failing to raise enough money to start your venture is a big mistake. You need to make sure you’re not underestimating the amount of capital you need to achieve your vision. Understandably, you might be a little hesitant to carve off pieces of your business in order to bring on more investors. However, the difference between success and failure in the start-up period is often down to being able to keep up with your closest competitors. Having more capital to fall back on also means that you can afford to make mistakes in other areas! Whether you pitch your business to a handful of influential investors or you go to a creditor like BusinessLenderMatch, the money’s got to come from somewhere! Just make sure you keep close tabs on your overall cash flow and avoid going into debt. Furthermore, don’t get too focussed on securing masses of money before you identify a profitable target market. A lot of new business owners seem to do this, and the result is often a total catastrophe!
Let’s push the clock forward a year or two. You’ve secured the necessary funding, hired a handful of staff, and now your business is trading. As you can imagine, you won’t feel like you’ve arrived just yet! Many young business owners get disgruntled when they realise they’re having to rush around taking care of every last aspect of the business, and not making any significant growth. To some extent, this is just an unfortunate truth that comes with the job. However, in some cases it’s the result of the business owner forgetting about the value of human capital. If you’re simultaneously the CEO, receptionist, janitor, head of marketing and chief accountant, then first of all I salute your dedication! However, we can’t all be polymaths. If you spread yourself too thin you could end up holding your business back, rather than helping it. You may be in this class of new entrepreneurs who needs to respect the value of human capital. Human capital is defined in a number of ways. The main things you need to know is that it equates to real money, and can be understood by quantifying the value of your time. Seen as you’re reading this, you’re probably brimming with incredible business ideas. However, these will be completely useless if you don’t have the time to invest in making these ideas a reality. Seen as you’re new to the whole world of running a business, you may be used to the idea of being a one-man band. At the very least, you’ll be paranoid of failure, and afraid of losing all the capital you currently have! Still, I urge you to hire a few more staff to cover all the nitty-gritty tasks you’re doing yourself. Provided you’re not the worst recruiter in history, this will end up being a smart investment, rather than another expense you need to cover. While someone else is dealing with IT issues or cleaning up the office space, you’ll be able to invest your time where it really counts. You can start recruiting new staff now at TotalJobs.
It’s another big mistake to go “all in” with your available capital too early in the process. Many new entrepreneurs start their business with long term goals in mind. This is a good thing in some ways. After all, thinking big is what gave you the courage to quit your day job in the first place! However, this kind of attitude can often be your worst enemy when it comes to managing your business finances. I read an article not too long ago about a software start-up with a brilliant product that got a lot of pre-launch publicity. From the day of the launch, the company was turning a healthy profit. In all the business journals, it appeared that the CEO was worth millions. I’ve since found out that this very CEO had to bring in some financial consultants to turn things around. Although the business appeared to be doing well, the founder had nothing in the bank to show for it! He’d essentially been investing 100 per cent of the business’s profits back into the business. If this is what you’ve been doing, then in some ways it’s totally understandable. You’ll be able to hire more staff, invest in new tech, or move the operation to larger premises with more facilities. However, without the capital to write an unexpected cheque or protect cash flow, you’ll be walking on extremely thin ice. By all means, invest some of what you make back into your business. I’m sure you don’t want your life’s work to just sit there after all. However, having a fairly substantial cushion in the coffers is also very important.
The final financial blunder you can make when starting up your business is neglecting to find a mentor. Every successful CEO should have some kind of mentor. This is typically someone who knows the industry better than you, and who can talk you through all the ups and downs of running a business. You may already have someone like this as a favourite contact on your phone. However, if you think their financial know-how doesn’t quite measure up to some people’s, it may be an idea to seek out a separate, financial mentor. Just be discreet if you think your original mentor might get a little jealous! Hopefully you’ll already have someone in your inner circle who has some experience with number-crunching within a business. If not though, it’s probably still worth finding a professional to help you out. Like a lot of new entrepreneurs, you may feel like help from pro financial advisors is a little beyond your reach. This isn’t necessarily true. While some companies and consultants save themselves for more elite clients, there are others that will work with businesses of all sizes and budgets. Remember how I told you to realise the value of human capital? Well, this is very true when it comes to managing your financials. Bringing in a consultant for a brief period can teach you a lot about managing the finances of your business, and hiring a full-time adviser can take care of the issue indefinitely. Whatever you do, don’t bite off more than you can chew!
There you have some of the biggest financial mistakes which you need to steer around when starting a business. Ignore your cash flow, and you’ll drive your business into the ground. Manage it well, and you’ll catch up with your vision faster than you can imagine!