Entrepreneurs are gutsy. They understand the customer, and they are always trying to provide the right value to the customer. But sometimes entrepreneurs make mistakes. Especially when it comes to the finances of the business, which are not always at the forefront of their mind. They are already trying to juggle 50 balls at once—to require them to sit in front of QuickBooks once a week for five hours may be asking too much.
So let’s discuss five far too common finance mistakes that we see startups commit:
They forget the debits and credits
We see it all the time. Companies either aren’t tracking major expense or revenue items, or their accounting system is not organized to ever give them something meaningful. It shouldn’t come as a surprise, but your “numbers”, or the reports that you produce for yourself and your potential investors, are only as good as the data going in. Make sure that you not only have a system set up for collecting and inputting every single piece of company transactional data, but that you have hired an expert to help you set up the system into which that information is going.
Growth and more growth
Experience expansive, gang-busting growth, and everyone in the company thinks that as long as revenue keeps growing quickly, the business is sustainable. Growth comes at a cost, and that cost usually involves putting money down to buy raw materials or invest in people, and then only later seeing the result by way of revenue and profits.
But there is always a delay between those two points, and during that time is where many a growing company has faltered and fallen. It is critical that every growing company maintains an accurate budget and projection of cash so that they know when they’ll need outside cash infusions to maintain their pace.
Feeding the overhead behemoth without regard to the tight-rope of recurring revenue
Slow and steady wins the race, and this is no truer than in the balancing act of hiring employees, moving into new space, and adding benefits. Early companies that fail have often committed the error of adding too many of these items with little regard to that oh-so-necessary item of recurring revenue.
Many business models experience a bump with customer acquisition, and then a lower, fixed amount that comes in every month. This is a wonderful model, but one should take caution in growing their business on this model. Expecting that the up-front revenue will always be there to cover overhead costs can be a dangerous game. Instead, owners should consider adding overhead only to the extent that recurring revenue grows. Basing overhead costs on recurring revenue may result in fewer employees or a smaller office, but it is a more sustainable growth plan.
Focusing on the wrong numbers
Revenue is vitally important, but it shouldn’t be the one and only focus. Good entrepreneurs are tracking costs to acquire customers, costs of overhead, and most importantly, the non-financial numbers that indicate the source of their customers. For example, knowing 60% of your customers are coming from a sales channel where you only spend 30% of your sales and marketing, my make you reconsider investing more into that channel. There are lots of numbers to track, be sure that you’re focusing on Key Performance Indicators that drive profitability in your company.
Focusing too much on the wrong capital
The final mistake that we feel should absolutely be included on this list is an entrepreneur’s focus on the wrong type of capital to grow the business. External capital (investment) is very intriguing and highly sought after for a number of reasons, none of which should be reaching a status or investor validation. Unfortunately, this is all too common. Entrepreneurs should, wherever possible, focus on internal capital that comes from profit generated from sales. Internal capital is far cheaper than external capital, and will only make the process of raising investment, if needed, much easier down the road.