Launching a startup is absolutely exhilarating. Watching it grow as a direct result of your investment of time and money is incredibly fulfilling. Here are four financial pitfalls to avoid so you can keep your startup growing and the fulfillment coming:
Pitfall No. 1: Not Having Enough Money From the Start
How it can hurt you: The most basic problem with money is not having any. Entrepreneurs often make the mistake of running out of startup capital before they have a chance to accomplish everything they wanted to do with it. That means they have to go through the arduous task of scrounging up more funding or watch all their efforts be wasted.
How to avoid it: Proper budgeting is essential to prevent startups from running out of cash. When you’re meticulous about how every dollar will be spent, you’ll know exactly where you are at all times. Usually, simply paying close attention to what you’re spending will keep you from being surprised.
Pitfall No. 2: Making Large Purchases Right Away
How it can hurt you: It can be tempting to spend big right out of the gate, but is one of the more dangerous financial pitfalls. You may believe that a piece of state-of-the-art equipment, prestigious property or massive advertising campaign will give you a leg up on the competition. However, acting on these beliefs can take a huge chunk out of your initial capital or put you into serious debt at the worst possible time.
How to avoid it: It may not be sexy to start small, but it might be necessary for your enterprise to survive the first few years. If you need to make major purchases, do so cautiously and with a firm plan in mind. Evaluate each of your significant expenditures carefully and think about your budget. Be sure to also vet your supplier thoroughly.
Pitfall No. 3: Not Preparing for the Future
How it can hurt you:Starting your business involves a great deal of legwork. Yet just because you’ve opened your doors to customers doesn’t mean you can stop planning. If you’re not ready for growth, you may be blindsided by change. Even if you’re not thinking of expanding, sudden disruptions in the marketplace could turn into a disaster if you’re not prepared.
How to avoid it: It’s a good idea to revisit your business plan periodically and revise it if you think it’s necessary. Be ready to take into account how your customer base or product offerings may change in the near future. A strong internal culture with a solid identity also is important for weathering any changes. Above all else, learn to be flexible. Being too rigid in your thinking means you won’t be able to react when the market throws you a curve ball.
Pitfall No. 4: Not Properly Balancing Your Business and Personal Finances
How it can hurt you: You’ve poured blood, sweat and tears into getting your startup off the ground. You’ve most likely used some of your personal finances, as well. If this is done on a regular basis, though, you could be at risk from a liability standpoint. That’s not to mention the confusion that can result from not knowing exactly which money is yours personally and which belongs to your business entity. No matter what, it’s a situation that can cause great harm if you’re not careful.
How to avoid it: Setting up a separate bank account specifically for your business is crucial. You also should establish a credit history for your company by opening a dedicated credit card for it. Keeping your personal finances separated from your business accounts and never using your own money to pay for anything used by the company is a key strategy in avoiding financial pitfalls.
Author Bio: David Olson founded Virtual CFOs, LLC in 2003, long before the concept of a part-time CFO became well established. His previous 28 years of experience in private industry and public accounting made that possible. Since founding Virtual CFOs, he has helped dozens of companies improve their financial IQ, operations and prospects for success.
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