While the often-cited statistic that 9 out of 10 startups fail in the first five years is not quite accurate, the truth is, quite a few startups don’t see long-term success. And why do so many startups fail? It turns out that most first-time entrepreneurs are just not good at managing their finances. According to a recent CB Insights report , lack of financial management is the number two most common reason for startup failure. As a matter of fact, around 30% of examined companies fell short of their goals because they ran out of money.
It goes without saying that money is the essence of your business, and that’s why it is crucial – especially in the early stages of your startup – to have your finger on the pulse of the state of your finances. In addition, you have to be aware that knowing just how much cash is running through your startup is vital for guiding all of your business decisions.
Every startup out there has the potential to grow into a fruitful success, however, as an owner, you cannot depend on a stroke of luck to get there. In order to stay one step ahead of the game, you have to do your homework and get familiar with some common mistakes most first-timers often make.
Hiring Unfit Workers
For starters, you have to understand that no matter how much experience a person has in the corporate world, it doesn’t really equate to experience in the world of startups. Even though certain skills are transferable, a startup employee needs to have a specific mindset. Now, according to a Robert Half Technology survey, only around 16% of IT professionals prefer working at a startup, so when you’re building your team, look for experienced employees, who understand the startup microcosm.
Miscalculating your Expenses
In all fairness, looking for experienced employees isn’t really that hard, but you know what’s even easier? Miscalculating your operational costs. You see, according to a Hiscox survey of young business owners, around 33% of them regularly underestimate their monthly expenses. Your initial financial assumptions may be completely off, so it is smart to keep track of all of your expenses, to minimize these miscalculations.
Ignoring Financial Reports
Keeping track of your finances means looking carefully over your reports, so you would have a clear understanding of your financial state. Chances are, financials probably aren’t 'your thing' you have to make sure that your head of finances delivers them in a simple, easy-to-understand format. And keep in mind that, according to recent CCH Group research , roughly 35% of SMBs fail due to insufficient time spent managing books.
Managing Costs with Automation
Now, if your organization had enough money, you could simply do what most established businesses do, and hire a multiple of people and assemble an accounting team to watch over your finances. But we are going to assume that this is not an option for your startup. Fortunately, in the past few years, a wide variety of tools have launched, that allows startups to automate their financial management.
Instead of spending money on an actual bookkeeper, today, your company can easily find an online bookkeeping service like Bench to automate the process. The service helps its clients with two tasks each month – categorization (the app connects to your bank, PayPal and credit card accounts and imports your transactions into the accounting system) and receipt management (you upload receipts to Bench, and it attaches each one to the appropriate transaction).
If you want to have an instant insight into your finances, keep track of them and receive daily updates, you should opt for a financial solution like BodeTree. The system includes a cash tracker that helps you visualize your profit, expenses, and income in real-time. In addition, it offers a full bundle of financial insights that helps you set business goals, calculate your valuation and build a strategic roadmap that covers a number of different areas.
Managing benefits, tracking everyone’s information and employee onboarding is not only a time-consuming job but in most cases, requires the expertise of a financial adviser as well. Thankfully, there are a handful of employee benefits software solutions that can help you establish and successfully run a Human Resources function, even if your organization doesn’t have an HR department. It also provides notifications about any upcoming deadlines and creates a flow of information between you and your employees.
Some startup lessons have to be learned the hard way. However, the ones involving finances can be easily avoided, with a little bit of insight. All you need to do is look at where so many others have fallen, and be fully prepared to make better educated choices.