Elbert Hubbard, a famous American philosopher, once said, ‘The greatest mistake you can make in life is to be continually afraid you will make one.’ Although he said these words in the context of individuals, this principle applies to businesses as well.
When you begin to work on your startup, you are probably running your own business for the first time. Being new, you are likely to make some mistakes along the way. Instead of being afraid of making a mistake, you should acknowledge your mistakes and learn from them. Similarly, you should also learn from the mistakes that other startups have made.
Let’s talk about a very common mistake that nearly every startup makes at some point.
Biggest Mistake of Startups: Managing Money Wrong
According to CBI Insights, 38% of startups fail because they run out of money or fail to raise capital. If you keep up with the latest happenings in the startup world, you must have observed this as well. Much news about failed startups is directly linked to money problems.
Startups like Fipola, Belora Cosmetics, DUX Education, and Friyey failed because they failed to raise money or manage their money properly. We can guess, based on these examples, that one of the biggest startup mistakes is poor management of money.
When we start a new business, managing funds is one of the most important responsibilities put on our shoulders. We are liable to manage the money given by investors with great trust. Especially when a startup is burning cash (making losses), managing the money we have with great caution becomes very important. Many startups have failed because they
- Failed to calculate and record their cash burns accurately.
- Underestimated the future expenses of the business.
- Using business funds for personal expenses.
- Spending investors’s money on the wrong things.
3 Startup Mistakes and What We Can Learn From Them
If you don’t want to make the same startup mistakes, you must learn from the mistakes made by others. Seeing the examples of businesses that failed due to a lack of money management, we have extracted five important lessons that we have learned from them.
Lesson #1: Never Raise More Funds Than You Need
The wave of big numbers for your startup is riding high in India. We often read about the millions and billions raised by Indian startups in the news. But we should never blindly aspire to be like them. Instead of trying to raise the biggest amount of capital, you must calculate how much you need for your business goals. Make a plan for your business expansion and accurately compute the amount of capital you will need.
Lesson #2: Expect the Unexpected
In my personal experience, when startups predict their future expenses, they hardly leave room for the unexpected. You can only estimate some of your spending with 100% accuracy. When we prepare a budget for spending our business money, we must leave a buffer for unprecedented expenses.
Lesson #3: Make Realistic Growth Plans
Being ambitious is the most celebrated trait among startup founders. As startup founders, we feel the pressure of dreaming of being unicorns and thousand-crore revenue businesses. However, growth plans should also be realistic because some startups end up burning their funds in a crazy pursuit of growth. They should focus on customer satisfaction and quality rather than marketing, customer acquisition, and business expansion. This leads to the funds burning very quickly.
4 Ways to Avoid Your Startup Mistakes
Here are three tips for ensuring that you avoid making the same mistake in your company.
- Maintain Proper Books of Accounts
You must set up an excellent accounting system to record your income, expenses, and other transactions properly. Make sure that your books are up-to-date and accurate. Hire talented accountants and arrange training programs regularly to upskill them. Plus, you should use good accounting software that suits the needs of your organization. When you focus on building a good accounting system, you will always have information about your profits, revenue, assets, and tax liabilities.
- Take Financial Advice Before Making Major Decisions
Consult your chartered accountant and other financial advisors before making any significant expenses. For example, if you are planning to open a new branch of your business, consult finance professionals to make sure that you have the required funds for the branch. Listen to their advice and revise your plans accordingly.
- Focus on Your Working Capital
Having a strong working capital means having more current assets than current liabilities. Current assets include cash, bank balances, debtors, and other liquid assets, while current liabilities include your short-term borrowings, creditors, and other dues. To make sure that you have strong working capital, you should:
- Keep sufficient cash and bank balances in hand.
- Collect dues from debtors regularly.
- Keep your current liabilities in check to avoid negative working capital.
- Keep Your Costs in Check
As a business owner, you should try to keep your costs at a minimum. Before you decide to spend on any business expense, ask yourself these questions:
- Is the expense necessary for running your business?
- Will this expense benefit our growth?
- How will the business benefit from this expense?
- How will the business recover the amount?
If you believe that spending that amount is necessary for your business, go for it after consulting your financial advisors.
Once you start following these tips, you will gradually learn how to handle your finances in the best way. This way, you can avoid making the same mistakes that most failed startups have made.
Mistakes are an inevitable part of running your own business. All successful businesses have made mistakes in the past. But what did they do differently from those who failed? They learned from their mistakes. As an entrepreneur, you will mess up every once in a while. But you should always learn from your mistakes and correct them as soon as possible.
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The biggest mistake that nearly every startup makes at some point is managing money improperly. This includes failure to raise enough capital, inaccurate calculation of cash burns, underestimation of future expenses, and misuse of funds.
Improper money management can lead to startup failure by causing cash flow problems, hindering business growth, and ultimately running out of funds. Startups may fail to sustain operations, invest in necessary resources, or adapt to unexpected expenses.
Three important lessons we can learn are:
Never raise more funds than you need.
Expect the unexpected by leaving room for unforeseen expenses.
Make realistic growth plans to avoid burning funds unnecessarily in pursuit of rapid expansion.
Startups can avoid this mistake by:
Maintaining proper books of accounts to record financial transactions accurately.
Seeking financial advice before making major decisions is important to ensure sound financial planning.
Focusing on maintaining a strong working capital and keeping costs in check.
Learning from mistakes is crucial for startup success, as it allows entrepreneurs to adapt, grow, and improve their strategies. By acknowledging and correcting mistakes, startups can increase their chances of survival and long-term viability in the competitive business landscape.