Starting a business is an exciting time. But the reality is, one in five startups fail after only one year. One of the biggest reasons? A lack of funds.
Even if entrepreneurs get traction quickly, the first year in business isn’t cheap. There are employees to manage, tools to buy, and investments to make. Even in perfect conditions, funds tend to run thin.
However successful you might be, your funds are limited. As you work to get your business off the ground, make sure these ten key sources of financial waste aren’t sapping your resources:
1. Failing to Take Advantage of Deals
Startups don’t always have to pay top dollar for their materials and tools. Smart entrepreneurs look for sales and find cost-effective alternatives before pulling the trigger on a purchase.
Get creative to boost your buying power. If you need paper and pens, for example, back-to-school season might be a smart time to shop. For year-round savings, consider joining a group purchasing organization with other startups. Because suppliers prefer to sell in bulk, GPOs can secure discounts that individual companies simply can’t.
2. Growing the Team Too Quickly
If you’re like most entrepreneurs, you’ll want to scale your startup as quickly as possible. Act too hastily, however, and you could inflate your labor costs beyond what your young company can afford.
Hiring more employees than you need can spread resources thin without adding a lot to your bottom line. Calculate how much labor you actually need before adding more people to your payroll. Your goal should be to maximize production and minimize salary costs.
Think, too, about the quality of your hires. Bringing on the first people to knock on your door can deprive you of better candidates. You want to hire the most qualified people you can find, so be patient. It’s better to be understaffed for a couple of months while you wait to find the perfect person for a role than to bring on someone who won’t add much value to your business.
3. Going Big on Benefits
Taking care of your team should always be a priority. But in the beginning stages of your startup, you simply can’t afford to offer the best benefits on the block.
So how can you attract top talent? Sell them on your vision: What do you hope to achieve? How much do you expect to grow your company, and by what date? How will you reward team members who get in on the ground floor?
Don’t forget entirely about benefits, though. Choose low-cost ones, such as generous PTO policies and a casual work environment. Hold onto your big-budget ideas until your startup has proven itself and can comfortably afford them.
4. Decking Out the Office
Entrepreneurs love the idea of having their own office space. The trouble is, desks and chairs alone can cost hundreds of dollars each.
Don’t worry about the reverse-osmosis water cooler until you have breathing room in your budget. Remember that Apple, Amazon, and Disney all started in someone’s garage.
You don’t need a lavish workspace to get your ideas flowing. Concentrate on your product or service, and invest in an office space when the time is right.
5. Failing to Plan
Your startup won’t succeed by chance. If you want to build a profitable business, you need to plan it carefully.
Failing to plan is planning for failure. Think through “what if” scenarios, such as:
- What if my star employee leaves unexpectedly?
- What if my product doesn’t get traction?
- What if my supplies are lost, damaged, or stolen?
- What if a competitor scoops me?
- What if an investor backs out?
Have a fallback plan, such as a savings account, for your startup. If you’re bootstrapping, don’t put so much of your own money into your company that you’d be destitute if it failed.
6. Taking on Too Much Debt
In some cases, debt is necessary. If you can’t build your product without taking out a loan, then go ahead and talk to a bank. But if you can invest your own money or offer equity to an outside investor, you should do so.
There is no bigger source of financial waste than debt. The problem is two-fold: the opportunity cost, and the interest rate.
When you borrow money, you’ll have less wiggle room if you need to ask for a future loan. And even if you don’t, you’ll pay everything you borrowed and then some back thanks to interest. Startups with too much debt end up using all their profits to pay off the interest — and no profits mean no progress.
7. Overinvesting in Advertising
Startups need customers to gain their footing. With that said, your first priority must be developing your product. After that, you can worry about marketing it.
Before launching a marketing campaign, you need to do some research. Not all types of marketing are equally expensive: Email and social media are practically free, while traditional ads can cost thousands of dollars to place.
To decide on your strategy and channels, ask yourself:
- What’s your target audience?
- Which platforms would reach them best?
- What makes you a better choice than your competitors?
- How much of your budget should go toward advertising?
8. Forgetting About Taxes
There’s no way around it: Businesses pay taxes. You can lighten the blow, however, if you’re proactive about paying taxes and not reactive.
When getting your startup going, reserve money from each transaction so you aren’t blindsided by a big tax bill. Set aside roughly a third of each sale — while you might get some back, it’s better to put away too much money for taxes than not enough. And be sure to take advantage of common startup tax deductions.
9. Building a Flawless Product
Every entrepreneur dreams of building the perfect product. Unfortunately, by the time they’ve perfected their product, they’re either out of money, or the market has moved on to the next big thing.
While making sure you have a sound product is important, you shouldn’t let it stop you from taking off. Build a minimum viable product, and ask for customers’ feedback to help you improve it. Being nit-picky about your product before it’s even on the market is a waste of time and money.
10. Buying Brand Gimmicks
A brand is only as good as its products. Unless yours is as good as it possibly can be — and when you’re in the startup stage, it shouldn’t be — forget about branded merchandise. Custom-printed hats and tote bags cost more than you think, and they won’t help you turn a profit.
What if you’ve promised your investors or family some swag? Start by making some t-shirts. Not only do they cost less than other kinds of printed merchandise, but you can make your own with just a heat press, some plain shirts, and a sheet of colored vinyl.
To build a profitable company from scratch, you have to manage your money wisely. Don’t let your ego dictate your spending, and you’ll be miles ahead of most new entrepreneurs.