7 Big Time Money Mistakes Startups Should Avoid
You can face several complexities in terms of startup. You need to be sure that your starts up do not increase financial risk by taking capital or loans from wrongful sources. However good your products or services may be, they are irrelevant if you have not made proper financial decisions. It is always better to avoid financing mistakes for your startups beforehand.
Reliance on a single funding source
Instead of being reliant on solely on self-financing of start-ups you should opt for a variety of resources such as angel investors and venture capitalists to startup incubators. This creates a more diversified financing strategy for you, thus, managing risks effectively for the startup. You can opt for self-funding using savings or opt from financial investments from family members. But having an angel investor or venture capitalist on board may benefit your startups in numerous ways.
Inadequate working capital
Focusing largely upon capital investments of startups can adversely affect the working capital management for the start-ups. Based on a U.S. Bank survey, 82% of startups and small businesses fail due to poor cash-flow management. While fixed costs such as acquisition of fixed assets are relevant, your startup can requires appropriate working capital. This is needed to manage day to day operating expenses and other business activities. Shortages or deficiency in working capital leads to financial risks for your startups and can disrupt your business growth.
Failing to create a revenue model
Revenue model is a representation of cash generation strategies adopted by the start-ups and provides financial viability to the startup. Revenue generating source for your start-up can vary from product sales to product advertisements. These and other factors such as fee based services, data access, licensing fees or monetization of patents are relevant. Failure in creating a revenue model creates a “strategic gap” that can affect your startup from making profits. Starts up without a viable revenue model face hurdles in obtaining finances in crucial times. Revenue models vary based upon the nature of product or service offerings made by your startup and thus nature of start up matters. Moreover, revenue models assists in strategic decision making as the determinant of target market for your product or services is important.
Unrealistic financial estimates
Unrealistic financial estimates by your startup can arise from lack of market knowledge and over-estimation or under-estimation of costs and revenues. On many occasions, your startup can fail to take into account changes in market scenarios, trends or anticipate market disruptions . This leads to an unrealistic expectation by you for revenue generation and cash inflows., The difference between the actual and estimate can affect growth of your startup. Thus estimation and forecasting of startups should always be done appropriately.
Not emphasizing upon budgeting
Further, regular startup budgeting process requires to be done for both capital expenses by startups and day-to-day expenses of the startup. Managing large expenses and small expenses differently can assist you in management of your financial sources effectively. Apart from keeping a tab upon expenses, this also allows your startup in gaining a better cost estimates. Strategic management of costs can improve the cash inflows for your startup making its business operations financially viable.
Failing to prioritize financial payments
Prioritizing financial payments remains a crucial decision making factor for startups. This involves creating a priority driven budget that identifies expenses based upon necessity and potential benefits. From initial expenses to legal expenses, rents, acquisitions based expenses all remains relevant for your start up and requires judicious budgeting and planning. Others may include licensing fees for patents or intellectual properties that are crucial for the startup such as license to use certain software or production methods by the startup.
Not availing financial expertise
Many start-ups do not avail financial expertise at the outset thus leading to greater risks in future. There are other aspects such as tax planning and compliance with various commercial regulations that you should not be ignoring . These issues end up having adverse long-term repercussions on the financial prospects of the startup and can restrict the transition of startups into large-scale businesses. You won’t be able to capitalize on market opportunities or compete adequately your business rivals if you do not have a financial management policy at your startup. It is always better to avail the services of financial experts from the inception.