Every budget involves the amount of money which flows through your accounts on a monthly, weekly, even daily basis. A cash burn is a phrase which refers to the amount of money which is required to maintain a business on a monthly basis, and this is usually the most obvious tripping point for new start-ups. A budget only functions correctly if the people involved in making it both understand it completely, and stick to it faithfully. Not understanding the cash burn of a company will only lead to it constantly being overshot – up to thirty percent of start-ups are on record as having underestimated their expenses when they first got going. Get in touch with a financial advisor, who can help you well in planning your start-up budget.
- Misunderstanding the Market
This is another common problem among start-ups, particularly if they have not had much in the way of experience with work beforehand. Misunderstanding the market might lead to being too confident, or too lacking in confidence; this will therefore affect how valuable the start-up sees itself as, and lead directly to prices which do not fit with the market they are trying to sell to, either being too high or too low.
The best way to go about setting prices is to work backwards from the price itself, rather than attempting to combine all the various aspects of the work into one whole. Who is your customer, and what is their need? If you can fill that need, then work back – how can you fill that need, and what does it take to get to that point?
You should also take your competition into consideration, and also any trends which may be affecting the market.
- Expanding too Quickly
The biggest expense beyond overheads is the salary for your employees. A danger in start-ups is that the might try and expand too quickly and hire more people on, and therefore end up spending more money than they absolutely have to spare.
Additionally, while salaries for employees is its own expense, it has the potential to increase other expenses as well. Unless you have a purely online business, you and your employees will likely be working a shared space. That space must be paid for. The utilities for that space will increase, and will also need to be paid.
- Bad Hiring Policies
People always say that you should hire for experience, not for the potential that a person brings. If you are starting your own business, do not waste your money hiring someone with experience just to have that experience; it is much more useful to hire someone who you think has potential, and then increase their pay grade as they gain experience.
- Doing Your Own Finances
While it might seem cheaper in the short-term to tally up your own finances, in the long run it can cost you a lot. Finances can quickly become very complicated, and it ends up being something which takes up a lot of time to fully understand and come to terms with. It is much easier to simply give the financial work over to someone who is trained in working with it and understands it.
I think startups also too often fall into the “we can do whatever we want!” mentality. A lot of them focus on the ping-pong tables in the break room and unlimited PTO over the work quality or cash flow. It seems like some people are in a “coolness” competition over establishing a successful business.