What is a lesson learned from financial mistakes made in your early days as a startup?
To help you avoid common financial mistakes associated with the early days of a startup, we asked successful startup founders this question for their best lessons. From saving early to keeping an eye out for hidden costs, there are several important lessons that new startup founders should draw from to help get the best handle on financial matters that are especially involved in running a startup in its early days.
Here are eight financial lessons from that Founders learned from their startup days:
- Start Saving Early
- Do not Rely On External Financing
- Delegate Day-to-Day Operations to Free You to Focus on Growth
- Do Not Hire Too Early
- Get Financial Support from the Small Business Administration First
- Avoid Client Concentration Dependencies
- Set Aside Money for Taxes
- Keep an Eye Out for Hidden Costs
Start Saving Early
It is important to get through the early phases of business, but also important to plan and prepare for the long term. I see too many entrepreneurs and new business owners waiting too long to start saving, building an emergency fund, and putting a retirement plan in force. Time is money and it makes it much easier to start earlier vs later, even if it begins small.
Don't Rely On External Financing
One of the biggest mistakes young startups make is becoming too dependent on external financing, whether from venture capitalists, angel investors, or other sources. While it's important to have a healthy dose of investment in the early days, relying too heavily on this can lead to big problems. In the initial phase of my startup, I received a lot of investment from different sources. And while this helped get the business off the ground, it also created a situation where we became too reliant on this influx of cash. As a result, we didn't focus enough on developing other revenue streams and making the business self-sustaining.
Delegate Day-to-Day Operations to Free You to Focus on Growth
My first major startup was a DVD rental by mail company. As someone with no digital marketing experience at the time, I did an amazing job of driving traffic and gaining subscribers. But we reached a tipping point where I was spending most of my day stuffing envelopes alongside the few hires we had. We were bootstrapped and I was tired of surviving on ramen noodles. So, I didn't want to invest in more help. That was a mistake. I should have offloaded all of the operations work on a team, so that I could focus on discovering new ways to drive business. We were fortunate to have been acquired, and my career path was completely transformed for the better, as part of the deal. But had I been more visionary and less focused on the day-to-day, I expect we would have grown significantly more before considering a buy-out.
Hold Off on Hiring Too Early
My biggest financial lesson is to hold off on hiring too early. I started my first startup after college, and I was so excited about it that I hired too quickly. It was just me at first, but then when the company got going, and we were starting to get funding, I decided to hire some people for different departments. It was too soon for that kind of investment in terms of employees, but I was so keen about getting things done that I went ahead anyway.
Now, looking back on it, we could have waited until we had more money coming in and then hired those people at a later time when things were more stable. We ended up having to let some people go because they weren't pulling their weight or they weren't a good fit for our culture—and those costs were huge.
Tiffany Homan, Texas Divorce Laws
Get Financial Support from the Small Business Administration First
The financial lesson I learned is to always go through the Small Business Administration for loans first before dealing with a commercial bank or using your own money. Most upstart owners have good credit, to begin with so using SBA loans is an option. I didn't know that back then. These are low-interest loans with generous repayment methods. I wish I had known that we qualified but I didn't do enough research for SBA loans back then.
Avoid Dependance on Limited Clients
From start-up, I learned that financial dependency on a limited number of clients could bring a burden to the business. While Starting Investor club, Our team had considerable clients from Small companies, and we had a solid start financially. Later on, when we lost some of the clients and made new ones, we struggled to pay the installment to the banks, then we realized we depended on our 30% clients for about 75% of our revenues. I have learned that dependence on a limited number of clients affects the cash flow of start-up businesses, and the strength of impacts is bigger than we imagine.
Karen Cate Agustin, Investors Club
Set Aside Money for Taxes
Embarrassingly, I had to borrow money to pay sales and income taxes during my first year in solo entrepreneurship. A hard lesson to learn! But one that has stayed with me, to my benefit. It's easy to estimate what is needed as revenue comes in, and I set that amount aside in a dedicated line so it could not be spent elsewhere.
Keep an Eye Out for Hidden Costs
One of the most important things I learned from my financial mistakes is to always be aware of the hidden costs of your business. For example, if you are going to hire employees, you will need to consider not only their salaries but also the costs associated with hiring and firing them: background checks and legal fees, as well as training and benefits. And then there are taxes! If you rent office space or store merchandise in a warehouse, you'll want to know how much it's going to cost per square foot—and whether that figure will change over time. It's also important to consider how much energy your company will use and how much it will cost you each month.
In short: make sure you're aware of everything that goes into running your business so that there are no surprises down the road.
Amy Gilmore, Learn Financial Strategy
Everyone has experienced some degree of challenge when it comes to managing the finances of their early-stage company. The key here is not to do it alone. Surround yourself with mentors, advisors, and professionals who are looking out for your best interest. If you ever have questions about how to structure your finances for your business - reach out to us at firstname.lastname@example.org.