Financial Pitfalls To Avoid When Growing A Startup Business

businessman pointing his finger to a graph to illustrate growing a startup
Growing a startup business requires making sound financial decisions. Here are some common pitfalls to avoid to keep your company afloat - and thriving:

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Growing a startup business is no easy feat. In fact, it’s not for the faint-hearted! As an entrepreneur, you will face numerous challenges that will put your staying power to the test. You’ll need to make smart decisions as you strive to keep your company afloat – and get it thriving.

You definitely have to be wise about how you handle your finances. According to statistics shared by Investopedia, 20% of small businesses in the US “failed in the first year.” But let’s not be ‘glass half empty’. The good news is – 80% survived!

As the site further shared, a common cause among failed businesses is “the money ran out because it stopped coming in.”

Cash flow is indeed the lifeblood of any business. So if you want to avoid the same disaster as the ill-fated businesses suffered, you have to correct bad financial practices before it’s too late.

Here are some money mistakes to steer clear of when growing a startup business:

#1. Mixing your personal and business money

First and foremost, it’s plainly wrong to mix your personal funds with those of your company. If you are serious about growing a startup business, you’ll keep your finances separate. Not only is it confusing, it can also eventually cause you a headache come tax time.

woman computing while holding money growing a startup business
Image source: Karolina Grabowska

Of course, setting up a separate bank account for your company is a must. In addition, keeping finances separate will allow you to establish business credit, which is usually a requirement for obtaining loans.

In a Bank of America post, we read:

“While lenders may look at your individual creditworthiness, they’ll also want to see that your business is in good standing with its creditors. Establishing separate accounts in your business’s name will help to establish the business as a separate entity with its own credit history separate from yours as an individual.”

#2. Not monitoring your cash flow

Next, you want to stay on track of your company’s cash flow.

As management consultant and author Peter Drucker once said:

“Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.”

Indeed, being aware of how much money is coming in and going out is crucial in effectively managing your finances. When done wrong, things can get out of hand and lead to potentially catastrophic consequences.  

Some basic tips to help you do this right include sending invoices promptly, keeping detailed records, reducing costs (more on this topic later), and using cash flow management software.  

#3. Going big on unessential expenses

As you pay closer attention to your cashflow, you need to identify which expenses are necessary and which ones are not.

For example, you should cancel subscriptions to software or services that aren’t directly helping when it comes to growing your startup. You may also want to discontinue spending on advertising methods that are clearly not bringing the desired results.

Remember: every penny counts!

By spotting areas of improvement, you get to save both time and money in the long run. Growing a startup business will be so much easier as you eliminate unnecessary costs.

A popular Benjamin Franklin quote reminds us:

“Beware of little expenses. A small leak will sink a great ship.”

#4. Growing your startup too fast

Upon tasting success, some entrepreneurs immediately rush to scaling up their operations to reach more customers. Be warned, however, that buying more equipment and hiring more people than you realistically need can be counter-productive. So be sure you’re ready – especially financially –   when you decide to expand your company.

man looking at images on whiteboard growing a startup
Image source: StartupStockPhotos on Pixabay

“You should always look for ways to improve your business, but there is such a thing as growing too soon or too quickly,” NY Times tells us. “Before you invest too much time, energy and other resources into your business, make sure it’s the right time to grow.”

#5. Ignoring tax requirements

Responsible entrepreneurs are acutely aware of their tax responsibilities. Regulations vary depending on your location and your business entity type. You have to check out local and state requirements to comply and stay in good legal standing. You also get to avoid late fees and penalties.

In a Forbes article, senior contributor Bernhard Schroeder wrote:

“As a self-employed individual or corporation, you must make estimated quarterly payments to the IRS so that you’re not stuck with a massive tax bill come April each year… Plan accordingly as this is now just a part of being in business for yourself. For the first time in your life, a tax advisor could be your best friend.”

Moreover, hiring a registered agent is also essential if you want to receive deadline reminders and get help in meeting them.

#6. Not paying yourself a salary for too long

Sometimes you get used to sacrificing so much for your business. But failing to allocate funds for your salary is an error you shouldn’t be making. While it may be necessary at the start, growing a startup business means you should be properly compensated as well.   

Hajo Engelke of Custom Choice Cereal told Entrepreneur that paying yourself means “you’re acknowledging your value to the business and what you want to get out of it eventually.”

He added: “No one else would run your business for free, so you shouldn’t, either.”

#7. Not having an emergency fund

Finally, saving money for a rainy day is important if you want to survive in the industry. As the pandemic has shown us, unexpected crises can happen any time. Being prepared ensures you will be able to prevent debt during the hard times.

The goal is to have enough funds to maintain your business for at least three months without any income flowing in. The more you can go beyond that amount, the better.

Final thoughts on growing a startup

In case you have problems with some of the factors mentioned here, here’s the good news:

You can start working on your areas of weaknesses so your company can achieve more financial stability. Sometimes growing a startup business means going through bad experiences – but take comfort in the fact that you can learn and improve.

“Success is not final, failure is not fatal: it is the courage to continue that counts.”

– Winston Churchill

*Featured image: rawpixel.com on Freepik

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