Startups make a lot of mistakes, it just comes with the territory. In order to succeed as a startup, you will need to make mistakes, take risks, and adapt quickly, but when it comes to your finances there are a handful of mistakes that you just can’t afford to make. These three common financial mistakes have killed many startups, make sure they don’t kill yours.
1. Overestimating the Market Potential
This is a very common mistake that kills many startups before they ever get going. The problem usually looks like this:
- You come up with a “great” idea for a new service
- You ask your friends and family what they think
- Friends and family encourage you to move forward with the idea
- You spend 6 months to write a business plan, create a website, and secure a small bit of funding
- Then you release the service AND… as it turns out no one is willing to pay for your service
The best way to get a quick idea if there is potential for your business to succeed is to use the Google Adwords Keyword Tool and check to see if anyone is searching on Google for a product or service like yours. I urge you to confirm that there is market demand for your product and service before you spend 6 months developing your new product or service.
2. Chasing Huge Contracts Without Financing
Another major financial mistake that I have watched many startups make is chasing after, and winning large contracts without having the financing in hand to complete the project. A common example is a startup company in the construction industry. You might bid a $500,000 project, and win, but now you have to find a way to finance it, and if you don’t have at least 2 years of business financial history, most banks will run in the other direction. Since you are a startup, you probably had to bid very low, with little room for profit on the project. This means you are unlikely to be able to secure investor financing because there is no upside potential for the investor.
3. Cash Flow Projection Mistakes
Lastly, there are a couple of cash flow projection mistakes that will kill your chances of success:
- Fail to Plan for Bad Debt Expense – In many industries, some percentage of your customers just won’t pay. If you require collecting all of your accounts receivables in order to keep a positive cash balance, you are setting yourself up for failure.
- Number of Days to Get Paid – Certain industries, certain customers, and certain projects won’t pay you for months. Your terms may be 30 days, but your customer may not pay you for 90. This happens all the time, do you have a backup plan?
These 3 financial mistakes may be too much to overcome for your startup. The solution is simply to plan ahead, that is all you can do. Some mistakes are unavoidable, but don’t hurt your chances of success by ignoring these avoidable mistakes that claim many startups each year.
Adam Hoeksema is the Co-Founder of ProjectionHub which is a web application that helps entrepreneurs create financial projections without the need to have a PhD in spreadsheet modeling.
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