5 Financial Mistakes That Devastate Startups

You dream of starting a successful business.

You hope to succeed. Who doesn’t?

You want your spouse to be proud of you. Perhaps your children will take over the family business one day.

You are so pumped that you could fly.

Hey you! You want a dose of reality?

Most businesses fail.

Why?

You guessed it. They fail because of money.

More specifically, they fail because of bad financial decisions.

Have you ever wondered what’s the one thing you can’t succeed without?

It isn’t your business idea. Neither is your passion for your business.

It’s MONEY!

Does this mean that you have to be rich? Of course not, but you have to be smart about your finances. Money doesn’t guarantee you success, but the lack of it guarantees failure.

I am sure you hear people telling others to “Dream Big”.

Dream small my friend.

Many entrepreneurs think that starting a business is about spending like there is no tomorrow.

Startup entrepreneurs can make poor decisions that will hugely impact the financial health of their startups.

Avoid the following financial mistakes to maximize your chance for success:

1. Fund your business right.

Never finance your business with your retirement savings.

They say “getting old is not for sissies”.

The only thing worse is being old, poor.

Don’t risk your retirement savings for any startup. Think of this as an absolute.

There are other ways to fund your business, here are some of the best:

● Purchase order financing/Factoring accounts receivables – PO financing helps you get required funds directly to the supplier. Factoring is similar to PO financing. It is based on unpaid amounts owed to your business.
● Save money before you start your business – It shows that you are serious about business.
● Use credit cards – Credit cards are easy to get if you have decent credit. Many successful businesses were funded by credit cards.
● What are friends for? – Your friends and family trust you and love you. Why not ask them to take a chance with you?
● Crowdfunding – The most common crowdfunding sites are Kickstarter and Indiegogo.
● Peer-to-peer lending – Prosper and Lendingclub are some of the most popular peer-to-peer lending sites.
● Microloans – Microloans are for usually for under $50,000. They are normally offered by nonprofit community-based organizations.
● Vendor financing – This is a form of lending in which a company lends money to be used by the borrower to buy the vendor’s products.

And a few more financing options as a bonus:

● SBA loan
● Product pre-sales
● Side business – you might have one of your business fund your startup. For example, it is common for startups to finance their business through consulting gigs.
● Angel investors
● Venture capitalists
● Winning contests – There are many business-plan and startup contests.

2. Be smart about long-term contracts.

For most businesses, signing a long-terms lease is almost always a bad idea.

Let’s say you sign a five-year lease for a 2500 square foot office. Business is good. Two years later you have hired more people you have space for.

What do you do now?

The easy solution is to move into a larger space, but you are stuck.

Remember the five year lease you signed? You are stuck for three more years.

You can plead, make threats, or break down in tears.

Your landlord will not let you out of your lease.

You do have options, but none of them are great.

You can lease a second office, but it will increase your operating costs. You have no good options only because you signed a long term lease.

Don’t do it.

If you are smart, you sublease or rent month-to-month.

Do you want to be free?

Avoid long-term contracts.

Sublease or find a place you can rent month-to-month. A great place to find subleases is through Craigslist. There are a bunch of businesses that made the mistake of leasing a larger space they need.

Their loss is your win!

You get to sublease from them month-to-month. In addition, you’ll probably spend less per square foot. If you want to move, in 30-days you are outta there.

In the above example, the growing company was stuck in a cramped office space simply because of a long-term lease.

Entrepreneurs that succeed keep their options open.

Avoid long-terms contracts like the plague.

3. Buy inventory.

Spending money is easy.

Smart entrepreneurs only spend on things that make them money.

Sell it first.

Only buy inventory when you are 100% sure you can sell it.

How do I do that? You might ask.

Take pre-orders.

Some of the most successful businesses have virtually no unsold inventory.

Sell before you invest in inventory.

Selling first helps you two ways:

A. It proves that people want what you have.
B. It proves that you have the right price.

Best of all, selling first will never bankrupt you.

Inventory control can make or break your business.

If you must have an inventory, manage it to perfection.

Having too much or too little can eat up your cash fast.

4. Hire staff too soon.

One of the most exciting time for a startup is when you hire your first employees.

Employees are expensive.

Business is cyclical. You might have a couple of busy months, followed by three slow months.

As a startup you might be better off working with contractors at first. It is easier to scale down with contractors than employees.

Do you want to lower your operational and labor costs?

Outsource and work with contractors.

Working with contractors gives you greater flexibility. Later on when your business is humming along, you can hire full-timers.

The most commonly outsourced business functions are:

● Customer support
● Accounting
● Web design
● Computer programming
● Data entry
● Writing/Content development
● Manufacturing
● Research & Development (R&D)
● Legal services
● Creative Services – PR, Marketing, SEO

5. Quit your job before your business makes money.

It’s liberating to know that you can quit your job.

But, is it the right thing to do?

Are you sure you have enough money to pay the bills until your business turns a profit?

Know how many months you can live on your savings. In business, everything takes longer and costs more than anticipated.

Quitting your job too soon could be one of the worst financial mistakes.

Don’t quit your job if you:

● Have insufficient savings.
● Are pumped up about business, but lack a real plan.
● Have a lot more to learn before you know enough to start your business.
● Hate your job and expect your business to help you love life.
● Are desperate to make money.

Do you want to do it right?

Start your business on the side and phase out your job as you start making money.

A steady paycheck takes a lot of the pressure off. Many successful startup entrepreneurs keep working during the day until they have enough revenue to replace their salaries.

It might take you a year or two to make enough money to feel comfortable about quitting your day job.

It’s the safe way to transition from employee to entrepreneur.

Want to know a secret?

The more financially dumb decisions you make the more likely will you fail.

Minimize your chances for failure and avoid financial mistakes.

Guest Author:
George Meszaros is a serial entrepreneur and the co-founder of Success Harbor. Success Harbor is dedicated to document the entrepreneurial journey through interviews, original research, and unique content. George Meszaros is also co-founder of Webene, a web design and marketing firm.

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Wade Danielson

Wade is a 4-time serial entrepreneur and is the Founder/Host of The Entrepreneurs Library. With a long time passion for reading books, Wade created an online resource and podcast for entrepreneurs who love to read personal and business development books. His long-term goal in life is to start an entrepreneurial home schooling program for children of business-minded families.