The four most common financial mistakes made by startups

Joel Svensson

Though you’ve probably heard some gloomy statistics about the rate of SME failure, these are typically exaggerated by poor data and statistical false-positives. What’s not exaggerated is how critical a role finance plays in the demise of those business that do go under.

A failure to manage costs accounts for around 60 per cent of all small business failures. To help prevent your business becoming another smear on a statistics sheet, we’ve outlined the top four financial traps the self-employed should look for.

Insufficient capital

While having a nice lump sum at the outset may provide a certain sense of security, it’s amazing how fast this can be frittered away as receipts begin to pile up. It’s vital to maintain a realistic grasp of where your money is going, how long it will be before your clients start paying their invoices, and when those invoices will turn into revenue – it may be quite a while before the business becomes self-sustaining.

Proper financial forecasting can be hard on one’s sense of optimism, but is necessary groundwork for survival.

Proper financial forecasting can be hard on one’s sense of optimism, but is necessary groundwork for survival.

Letting overheads outstrip growth

Upgrading to the newest software or POS system might seem like a smart investment, but unless these changes are necessary for growth, they’re probably best left for later. An inability to keep up with short-term obligations is a commonly cited reason for SME failure.

It really is a game of necessity. Does your business really need a bigger office, or are you just trying to keep up with the Joneses? Would another staff member be more helpful at this stage? Any decision that increases overheads should be evaluated with a ruthless sense of pragmatism.

Single-source income

If your business has only one client, and you’re not busy securing others, you’re essentially betting the entire future of the business on that single client’s continued patronage. While one client might be all you can handle at first, this obviously isn’t a sustainable model. The swim or sink nature of business is especially true for startups; if you’re not moving forwards, you’re going backwards.

The swim or sink nature of business is especially true for startups; if you’re not moving forwards, you’re going backwards.

Poor bookkeeping

Many nascent businesses fail because they neglect to keep accurate, timely records of accounts receivable and payable. As ShortPress has previously covered, cash flow problems are often responsible for many small businesses struggling. Keeping proper financial records and knowing when your obligations become payable may just help you avert an otherwise imminent cash crunch.

Joel Svensson

Joel Svensson is a Melbourne-based freelance writer specialising in politics and business.

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