Whenever someone asks me for a piece of business advice, I generally say the same thing: ‘Never run out of money.’ As an entrepreneur, running a business persist on the idea that you have the necessary funds to be operational. Just think about the worst-case scenario. What would happen if you fail to pay your employees, your suppliers, or your bank? As outrageous as this may sound, this situation tends to happen with various startups. For many cases, the reason comes down to the carelessness with company finances. To help prevent you from falling into these traps, I have provided four bad habits you should avoid.
1. Spending Money on Miscellaneous Items
For many financial and business experts, 2015 was commonly referred to as the year of the unicorn. With various startup companies able to launch and succeed beyond their own intended expectations, it seemed like nothing could go wrong. But, like the saying goes, with every great triumph comes an even greater fall. One of the simple mistakes many of these failed startups have done has been spending. Whether it is ego or success, the lack of intellectual humility for rising startups have forced great companies to go beyond their own financial limits. Yes, it is nice to have a Manhattan view or an office by the San Francisco bay. But, for any startup, the simple idea you need to embody is building a financial budget that can help you survive and expand into a strong and viable company. Because of this, make sure you cut down on spending. If there is any way that you can optimize your budget financial, make sure you do it. This can be something simple like cheaper office supplies or cheaper rent space. Whatever is the case, make sure you, as a business leader, are able to both recognize and leverage these avenues as your business continues to grow.
2. Misunderstand your Cash Reserves
One of the biggest misconceptions many startups have is that they are overly optimistic about their finances because they have this extra cash reserves. Just because you have an extra pool of cash does not mean you are necessarily in a good place. To prevent this from happening, make sure you understand your finances, which I will go further in-depth in the next section. Any type of underestimation or misunderstanding of your fiscal reserves can lead to unsound costly decisions. To put you in a better place, make sure you have that figure of how much cash you have at hand. Once that is noted, begin analyzing and adding up all other factors that can impact or affect this number in either a positive or negative manner.
3. Not Reviewing the Financial Numbers
When it comes to a company’s success, it is all about the numbers. Now, in the category above, I discussed much on the concept of overall cash reserve. To delve a bit beyond this, it is absolutely vital that you have a holistic understanding of the expenses your company is currently enduring. Take into allocation office space rent, employee salaries, office equipment, suppliers, marketing, etc. All of these factors will help you come up with a necessary figure to compare your total expenses against your total revenue to help you get the overall net profit your company is actually making. For strong business leaders, they make sure they have a strong understand of what these numbers means and what they can do to leverage it in the most beneficial way for the business. Even if it means spending more, having these numbers will help you, as a business leader, make strong sound decisions especially in regards to growth and development with your company’s future.
4. Failing to Forecast Cash Requirements
One of the biggest mistakes you can do is overlook your cash requirements. Too many companies, especially startups, have failed to maintain an accurate and organized up-to-date figure of their overall cash flow for their company. To remedy this problem, build and utilize a cash forecasting system that can transfer funds in-and-out of your account with ease.