Financial management is essential for any startup. It involves thoughtful decision-making, elaborate planning and consistent implementation of the most effective financial strategies. As CB Insights argues, the main causes of startup failure are running out of funds (38%), no market demand (35%), and severe competition (35%).
So, if poor financial management and lack of information can often lead to failure, then can following authoritative advice lead to success?
The answer is a resounding yes. Unfortunately, not all advice related to startups is equally beneficial, and some suggestions are even harmful. They may lead you to pitfalls rather than prosperity.
In this article, we shed light on some of the worst pieces of advice that startups get and that you should avoid following. Be on the lookout for these common myths and misconceptions you may encounter while starting your business.
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The Myth of ‘Spending Big to Grow Big’
The notion that spending extensively is the key to rapid growth is one of the most harmful myths. This concept implies that if you invest heavily in marketing, hiring top talent, and expanding infrastructure, you will thrive very soon and leave all your competitors far behind.
However, the reality is far more desperate. For example, the tale of Beepi is cautionary. According to Failory, the company was opened in 2013 and closed in 2016. Initially, it was meant as an online marketplace for used cars, promising to make all transactions easy, safe, and profitable. However, it soon ran out of operating cash, after spending in excess of $7 million per month. Large outlays such as buying expensive furniture and covering partner bills that were not directly related to the business contributed to the closure.
Another example is RewardMe. It was the world’s first sophisticated CRM (Customer Relationship Manager) platform for local commerce, starting in 2010 and closing in 2015. The company used to hold expensive conferences and meetings for potential investors and make other huge expenditures. Eventually, it suspended its services.
These cases demonstrate that strategic allocation of resources is pretty important. You will minimize risks if you invest in the realms that can yield the highest returns. So, be cautious and follow a considerate approach to resource allocation.
‘You Don’t Need a Budget, Just Hustle Harder’
Hustle culture has become a synonym for determination, high work ethic, and commitment to success in the world of startups. The idea that all a startup needs to succeed is continuous hustle implies neglecting financial planning and budgeting.
A budget is a straightforward guide for spending and allocating resources effectively. Without it, a startup always risks experiencing failure. The absence of a budget results in overspending, underestimating costs, and cash flow gaps.
While the hustle-harder mentality promotes the misconception that only sheer effort can guarantee success, strategic decision-making is an outcome of severe financial discipline. Making a budget is a cornerstone of effective financial planning for startups. It is a road map for financial success that provides clarity and control. It sets clear financial goals, identifies key expenses, and prioritizes spending. That will allow you to make well-informed decisions and achieve long-term objectives.
‘Ignore Your Financials Until You Are Profitable’
The advice to ignore financials until a startup becomes profitable is potentially dangerous. If you don’t care about your costs in the early days of your startup, you may face a wide range of issues, like cash flow shortages, random spending, lack of accountability, or accurate invoice management. In addition, operating in the dark can lead to making spontaneous decisions that can have disastrous consequences down the line.
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Instead, you have to pay thorough attention to tracking expenses and revenues from the very first days of your startup. That will help you identify problematic areas, make adequate decisions, optimize resources, and maximize profitability.
Moreover, early financial management is quite important for setting a culture of financial responsibility and trust within the company. When you scrutinize every expenditure, assess every investment, and make every decision with a clear understanding of its financial outcomes, you will ensure the correct resource allocation and sustainable growth. In addition, you will be able to anticipate all potential financial challenges and prevent them before they turn out to be inevitable. In this way, you will easily adapt to changing market conditions.
‘Invest All Your Savings into Your Startup’
You may often hear that investing all personal savings into a startup is a bold and decisive move. Nevertheless, it can jeopardize both your financial stability and the overall success of the venture.
First, consider the risk of total loss. Unfortunately, startup success is far from guaranteed, and even the most promising ventures can fail because of factors beyond your control. Try to avoid ideas that can lead to financial ruin.
Then, investing all savings into a single startup opposes diversification, which is a fundamental principle of wise financial planning. If you spread investments across different assets, industries, or geographic regions, you will always be on the safe side.
Finally, a lack of diversification can undermine your personal financial stability. No one can be fully protected against emergencies, unexpected expenses, or periods of financial uncertainty. Without a financial safety plan, you may face debt, bankruptcy, and other financial hardships.
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Instead, responsible investment in a startup includes such strategies as:
- setting aside emergency funds;
- limiting investment exposure to a reasonable portion;
- seeking external funding, such as venture capital, crowdfunding, or angel investors;
- monitoring personal finances, like savings, investments, and expenses, for enhanced awareness of the overall financial situation;
- developing contingency plans for various scenarios, including slow growth, failure, or unexpected challenges.
Don’t stick to the statement that investing all personal savings into a startup can demonstrate your belief in its potential. Be cautious and prudent, instead, while making any financial decision.
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‘Take On as Much Debt as You Can to Fuel Growth’
The idea of using as much debt as possible to fuel growth is tempting. However, excessive debt is a heavy financial burden that can prevent development and innovation and threaten the start-up’s viability. Debt levels may exceed your ability to repay and leave your company vulnerable to market changes and economic downturns.
If you allocate a significant part of your revenue to servicing debt, you won’t be able to invest in research and development. Product improvement and expansion into new markets will be unavailable, either. That can also diminish returns on investment. The startup will not generate enough cash flow to cover operating expenses or reward shareholders.
High debt can lead to financial instability, so your startup will risk bankruptcy or insolvency if some adverse events or unforeseen challenges happen. It won’t be flexible enough to withstand economic downturns, industry disruptions, or any other shocking changes.
Nevertheless, you can think about some alternative methods for funding growth, such as:
- equity financing, when investors provide funding in exchange for an ownership stake in the company;
- bootstrapping, meaning that funding can come from revenue from sales or personal savings of the founders;
- venture capital from the firms that provide funds in exchange for equity ownership;
- crowdfunding platforms that can raise capital from individual investors via online campaigns.
Consider financial risks from excessive debt carefully and try to avoid it anyway.
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Final Thoughts
We have tried to uncover some of the worst pieces of advice for startups here. Each of them carries its own set of risks and pitfalls. As you can see, the importance of strategic financial management is undoubted. It results in disciplined budgeting, prudent decision-making, and thoughtful resource allocation. If you prioritize financial transparency, long-term planning, and accountability, your startup won’t face failure risks and will use all opportunities for sustainable growth and profitability.
In addition, you need truly expert advice and guidance in the face of complex financial challenges. Consult with financial advisors, engage with mentors, or use the expertise of industry professionals to make informed decisions and avoid common pitfalls. Sound financial management is the overall advice that you have to follow in your entrepreneurial journey.
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