Business owners don’t know what they don’t know. The beauty of mistakes, however, is that they make you infinitely wiser. Smart business leaders won’t flinch when they lose a client, customer or potential revenue source -- they’ll reinvest that mistake into their own learning.
What new business owners can’t afford to lose, however, is money. When you’re bootstrapping -- using personal savings to fund your new venture -- you’re putting your financial future on the line. Lost money can directly impact health, future, and immediate well being.
With approximately 543,000 small businesses launching each month, the harsh reality is that the majority of these will fail. So if you’ve invested money into your business, there is a distinct possibility that you’ll lose everything. But that doesn't have to be the case.
The best way to prepare for the worst is to learn from successful bootstrappers who have been there before. Below are seven financial mistakes to avoid, especially when self-funding your new venture.
Hiring too aggressively
Tip contributed by: Deborah Sweeney of MyCorporation
Company type: Online legal and business filing service for entrepreneurs and small businesses
“Hiring too many employees can be an expensive problem. Being in California where the cost of employees such as insurance coverage is very high, the risk of taking on too many people is significant.”
Advice: Sweeney recommends pushing existing team members harder, giving raises and making sure that there is a definite need for additional staff before hiring the next employee.
Idealism about costs
Tip contributed by: Tom Alexander of PK4 Media
Company type: Online advertising
“One of the biggest lessons I learned was that any company will cost approximately 20 percent more time and money than originally planned. There are always issues that arise that cannot be calculated from the beginning, such as slow vendors, extra cost and time to build the technology.”
Advice: Alexander encourages business owners to operate with a buffer. Expect to spend more than what you originally plan so that unforeseen expenses don’t yield a loss.
Branding too soon
Tip contributed by: Rebecca Tracey of The Uncaged Life
Company type: Small business coaching
“I spent $1,000 on a copywriter when I started my business and three months later my direction had changed so much that they brilliant copy was virtually useless.”
Advice: Tracey encourages clients to wait at least six to 12 months before fully investing in copywriting and design services. That way their branding will be spot on.
Failing to calculate burn rates
Tip contributed by: Steve Spalding of Project MONA
Company type: A platform for multi-disciplinary thinkers
“The biggest mistake I've seen is not properly defining a burn rate. A lot of small business owners think that the burn rate is just server costs,office space and the fixed expenses associated with lawyers, accounting and the rest. What they ignore is that committing to building a small business means committing to deferring your income for an indefinite period of time as that business grows.”
Advice: Spalding encourages business owners to acknowledge that they will be deferring income for an indefinite period of time and to incorporate rent, food, health insurance and utilities into their business’s financial plans.
Not keeping your spouse in the loop
Tip contributed by: Sean K Murphy of SKMurphy
Company type: Offers customer-development services for startup entrepreneurs.
“The biggest mistake you can make is not keeping your spouse in the loop if they are working and keeping the lights on while you bootstrap.”
Advice: Shafter encourages business owners to treat their spouses as investors or board members with whom you can share detailed accounting plans.
Spending too much money on features
Tip contributed by: Mattias Guilotte of Coworks
Company type: Creative services
“When we started building Coworks, my co-founder and I hired two developers and spent between $30,000 and $40,000 building a pilot. This version of our product empowered us to get seed funding but our time and resources would have been better spent talking to customers. We should have been much more lean with our budget. We could have done more with less.”
Advice: Guilotte encourages business owners to spend more time planning their budgets. Focus on executing high-impact initiatives. Features can be modified later.
Shortcutting your talent
Tip contributed by: Jillienne Helman of RealtyMogul
Company type: A marketplace for accredited investors looking to buy shares of real-estate property.
“One of the biggest challenges of bootstrapping is attracting high-quality talent. If you cannot pay top dollar, how do you get amazing talent intothe company.”
Advice: Helman is able to attract top employees by offering equity. Every employee at RealtyMogul is a part owner. The company sets aside a piece of the company for stock options.