It’s no secret that starting and running a small business amounts to a challenge. The rate of private-sector businesses that close in their first year is very high—more than 23% for the last full year of data, according to data from the U.S. Bureau of Labor Statistics. And that rate actually rose in the last full year of measurement.
So that means a lot of businesses are going under every year, many of them right from the start.
The reasons for this are many. But one certainly is a lack of proper planning.
It doesn’t matter how great your idea for a product or service might be—if you don’t use financial planning to run your business, you will fail. In fact, in an analysis by CB Insights of more than 110 startup failures, running out of cash was the top-cited reason, contributing to 38% of startup failures. Pricing and cost issues were also cited in 15% of startup failures.
Quite simply, if you aren’t able to manage your finances, your business isn’t going to last long, even if you have some initial success. Fortunately, making things right and putting yourself on more secure financial ground is more straightforward than you might expect.
Why do so many startups struggle?
The reasons why so many startups struggle with financial planning are fairly straightforward. You may be an expert in your niche and have developed an exciting new product or service, but this doesn’t mean you know how to pin down the exact numbers for how much it will cost to make that business plan a reality.
Accurately planning and managing finances can be very time-consuming. Even for entrepreneurs who have a solid financial background, the sheer number of other responsibilities they have can cause them to put finances on the back burner.
Whether the result of a lack of knowledge or a lack of time, financial planning usually goes awry simply because it isn’t given the attention it deserves. New entrepreneurs are especially prone to making costly mistakes as they grow their business. As such, there are some important things every entrepreneur should do to make financial planning a priority:
Calculate your cash burn
Every business has fixed and variable costs. Even if you operate your business out of your own home, you incur expenses for rent, utilities and any software or contractors you use to help run your operations.
These numbers can add up surprisingly quickly, yet many business owners don’t take the time to fully understand how much they spend (or burn) each month. In reality, calculating your cash burn should be your first priority, as this tells you how much money you need to earn to keep the business running.
When you start your financial planning by calculating your monthly expenses, you will have a clear, realistic guideline for how much you need to earn to break even.
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Develop a budget plan when setting new goals
At any stage of a business’s growth, entrepreneurs will set goals for growth — but to achieve these growth goals, they need to spend money.
In a blog post, FP&A software provider DataRails explains, “The process of planning and budgeting starts with defining the objectives of the organization over the planning period. Clear objectives are then supported with a plan. For example, the objective might be to grow revenue by 10%. The plan would then include clear steps on how to achieve this, perhaps through targeted marketing campaigns, aggressive sales tactics, or incentives. A budget would then be drafted to support the plan. EPM systems can be used to automate financial planning and budgeting processes.”
Trying to scale too quickly or aggressively without proper budgeting can completely derail a company that was previously doing well. By fully integrating a budget with clearly defined growth goals, you can achieve sustainable scaling.
Mistakes New Business Owners Make (And How to Avoid Them)
Don’t hire too quickly
Human capital is one of the biggest costs for any business. Quite often, after a startup begins to experience a certain level of success, it’s natural for the founder to look to hire full-time assistance to help manage essential tasks or to fuel additional growth. However, businesses that rush into these hiring decisions can suffer significant financial losses.
In an interview with Growth Institute, Matthew Ross, co-owner and COO of the Slumber Yard, gave this example: “After a couple of weeks, it was apparent that we had hired the wrong candidates. Whether they didn’t possess the skills necessary to succeed in the position or didn’t fit into the company’s culture from a personality standpoint, these hires actually hindered the company’s growth.”
Rather than seeking to expand your staff immediately with full-time hires, consider outsourcing certain tasks to contractors or using automation tools. This can be much more cost-effective, while still giving you more time to focus on higher-level tasks.
Budgeting in Buckets: What, Why and How?
Turn it over to a professional
As has already been mentioned, the average startup founder isn’t a financial expert. At the same time, many founders have a strong DIY mindset that can make them resistant to getting help. They may view professional financial planning as just another added expense.
In reality, turning over financial tasks to professionals will be much less costly than making a mistake when attempting to do financial planning on your own. A small business may not need to hire a CFO, but it can still benefit by outsourcing accounting, bookkeeping and other key financial management tasks to reliable financial professionals. Ensuring the accuracy of your financial information is essential for informed and accurate decision-making.
As a startup founder, you already have a lot of responsibilities. But this doesn’t negate the importance of financial planning. By making finances a key factor in all decision-making and knowing when to turn things over to the pros, you can set yourself up for long-term stability and success.
