Getting a brand-new business off the ground is a difficult venture even when an entrepreneur “does everything right”—making missteps when running a fledgling company can be disastrous. Financial mistakes that can hamper an established business can mean a swift exit from the marketplace for a startup.
Unfortunately, there are common misunderstandings and poor decisions that regularly sideline small businesses. Below, 15 Forbes Finance Council members discuss some common financial missteps entrepreneurs often make during the first year of their businesses that may have catastrophic consequences and what to do instead.
1. Believing Early-Stage Cash Burn Will Improve On Its Own
Launching a brand-new business seldom includes “doing everything right”—even for the most seasoned entrepreneurs. With that said, a common misstep is the assumption that the startup’s early-stage cash burn will somehow improve once the launch is over. Stick to the pro forma, identify overruns and maintain enough cash on hand to bridge into the first two to three quarters of stabilized revenue. – Josiah Waters, Steele Waters LLC
2. Purchasing Software That Doesn’t Scale
One of the most common financial missteps entrepreneurs make is purchasing software that helps them get up and running but doesn’t scale. When systems that could be speaking to each other are not, it creates silos and obfuscates insights. Not only does this hinder business growth, but it also frustrates employees, who end up having to do busy work instead of focusing on their actual jobs. – Michael Sindicich, TripActions
3. Hiring Too Quickly
One common misstep is hiring too fast. We’re all trying to get things done quickly, but the wrong hire(s) can have a devastating effect on your company and growth. Hiring is one area where I always try to go slow; it is not easy to revert back to hiring decisions if you make a mistake. The time you might save by hiring quickly may end up costing you many times over if you don’t take the time to get it right. – Rafael Loureiro, Wealth
4. Not Preparing For The Worst
When getting started, businesses should avoid making aggressive assumptions. While they want to hope for the best, they should prepare for the worst. This can give them the wherewithal to overcome unexpected challenges during the first year. With this in mind, startups should consider additional expenses in setting up infrastructure, be aware of potential obstacles and plan accordingly. – Ben Carmona, Perch Wealth
5. Spending Cash In One Area Without Forecasting Needs In Others
A common misstep after a successful funding round is to boost spending on customer acquisition before carefully forecasting cash needs in other areas of the business (such as working capital) for an extended period of time. Additionally, the instinct can be to hire quickly, but responsible growth should be built upon judiciously developed processes and addressing inefficiencies as a company scales. – Lori Cashman, Victress Capital, LLC
6. Hoping Revenue Will Catch Up With Spending
The most common mistake I’ve been exposed to is spending too quickly and hoping revenues will catch up before you run out of cash. This makes you highly dependent on external capital and will make you extra vulnerable in economic downturns. Spend gradually on the essentials only, and grow efficiently! – Ariel Katz, EverC
7. Not Creating A Two-Year Financial Plan
One financial misstep by a startup is not having a good financial plan in place with expectations and projections for the first two years. One of the keys is to forecast where dips in finances might come so you can develop a plan to manage them before they actually happen. When you hit a problem and you take your eye off the core business to focus on finances, it can derail you quickly. – Evan Jehle, FFO LLC
8. Giving Away Too Much Equity
Eager to get their businesses launched, startup owners often underestimate future shareholder positioning when raising capital and give away too much equity in their businesses. Do not overlook financial modeling and cash flow projections. Create “what if” scenarios to show varied opportunities for capital infusion. Create investor packages that include benchmarking and industry comparisons. – Leslie Heimer, American Liberty Mortgage | Stockworth
9. Making ‘Strategic’ Investments Too Early
Everyone seems to want to get to the finish line way too quickly, and many end up investing too early in non-revenue-generating efficiencies when the business is not quite ready. Doing this takes financial resources away from driving the necessary revenue to keep the lights on. There is a time and a place for strategic investment, but it’s not usually at inception for a startup. – Drew Gurley, Redbird Advisors
10. Not Having A Plan To Pay Yourself
One misstep many entrepreneurs make is underestimating the amount of capital that is required to start their business while also paying themselves. Many rarely account for how much they’ll pay themselves in the initial startup phase. My advice to an entrepreneur is that startup costs need to include paying themselves for at least two years to ensure they’re protecting the business from personal financial stress. – Robert W. Bache, Senior Healthcare Direct, Amerlife DTC
11. Underestimating The Time It Will Take To Get Off The Ground
New entrepreneurs tend to underestimate three key factors: how much things will cost, how much money they’ll need and how much time it takes to get a new business off the ground. Your projections are essentially just guesses on paper, and they’re almost always overstated. My best advice: Stick with it. Unless you have all the money in the world, it’ll take time for you to make it to the next level. – Joe Camberato, National Business Capital
12. Overestimating Digital Marketing Skills
One financial misstep is not investing in their digital marketing skill set. It’s not one misstep—it’s more like 20 things that a startup has to get right with digital media, including ranking on Google, maps, local listings, reviews, social media platforms, hyperlocal sites and more. Whether you’re running a restaurant or a hair salon, you must be on top of digital media—not just once, but continuously. – Jaideep Singh, FlyFin AI, Inc.
13. Overspending On Overhead
The first year is typically a tough year for any new business. Not forecasting correctly and understanding how far your cash on hand will go can be detrimental to a new business. Try to keep your costs as low as possible on items such as rent, office equipment and software. Invest in people and marketing. – Will Tullos, Reliant Mortgage LLC
14. Neglecting The Bigger Picture
During the pandemic’s height, many businesses failed because they understood their core product but didn’t understand vital parts of their business, such as cash burn rate and risk mitigation. That’s one of the biggest financial missteps an entrepreneur can make. A product alone does not create an enterprise, and as a startup, cash flow is king. Ensure you and your team focus on the big picture. – Lee Henderson, EY
15. Not Developing A Written Plan
My father used to say, “If it is not written down, it will not happen.” Write down where you are, where you are going and how you plan to get there. Then budget that to the Nth degree, and manage the budget. Plan for contingencies, and be ready to pivot when needed. Be flexible and be ready to fail, learn, reassess and thrive in the best way possible. – Cynthia Hemingway, Fourlane, Inc.