Startups: Don't Make These 3 Financial Mistakes
As a new business owner, you are faced with huge decisions on a daily basis. Who should you hire? What should your logo look like? Where and how should you incorporate your brand? And the (literally) million-dollar question: What to do with your startup money? How you manage your initial funds is critical, especially because many entrepreneurs use their life’s savings to make the leap into independence.
As the owner of a financial firm (and began as a startup) I have seen many entrepreneurs take those first financial steps --and often they make these three common mistakes:
1. Devaluing human capital
How are most businesses created? One person has a big idea and they turn their thoughts into a tangible asset. For most startups, the new entrepreneur must take on every project for him/herself. The founder is typically the CEO, the salesperson, the janitor, the secretary, the receptionist….the list goes on. However, taking on all the nitty-gritty tasks of running a company is often a big financial mistake. Why? Because of human capital.
Think of it this way, your dreams combined with the ability to make them into a financial reality equated to human capital. Human capital is real money, it is the business owner’s "future value," if you will. It is the capital he or she is capable of earning - the POTENTIAL. Another way to understand human capital is to try to quantify the financial value of your time. Your idea is great but what is it worth if you don’t have the time to nurture it?
Instead of trying to do it all, respect human capital by giving it the most power. Know that every moment you spend disengaged from your purpose can be a moment of permanently lost human capital. Instead, consider delegation as an investment, not an expense, and an investment that enables you to devote more of your precious time into your core pursuit.
2. Going 'all in'
In working with many entrepreneurs, we have also found that they tend to be focused on growth with a long-range mindset. After all, a common thread of many great businesses is thinking BIG. However, this kind of thinking can be your worst financial enemy.
For example, recently a tech startup engaged our firm for business planning services. The startup had a great product, and once it launched- the business was immediately making money. On paper the owners were worth millions. So why did they come to us? Because the reality was that they were rich on paper but broke in the bank. Zero cash.
They had mismanaged their profits by literally investing "all in" -- every penny -- back into the new business.
When you start making money it’s easy to want to invest 100 percent back into your company. Make new hires, move into a better space, upgrade your technology. Building something is great, but if you can't write a check, and can't protect your cash flow, what is it really worth? Sometimes, just a little reserve goes a long way. It can give you more peace of mind than even the most profitable of businesses.
We ended up helping them reorganize expenses and sharing some ideas and strategies to help conserve and build margin into their cash flow.
In other words, we recommend building a short-term cash cushion that is separate from the money that sits in your operating accounts. Reinvest in your operation -- of course -- but save a little. It will provide you with unparalleled peace of mind.
3. Not having a financial mentor
It is widely known that new entrepreneurs should find a mentor. Every CEO has someone they can talk to about the ups and downs of running a new company, someone who helps them make the tough decisions. This same adage goes for keeping your money organized.
Don’t do it alone. Many fall into the trap of thinking that they need have to "have money" to work with an advisor. Wrong. Financial firms like ours work with clients at each stage of the game. As mentioned in point one, we see potential and value human capital. An entrepreneur with experience can help you get there -- to see the human capital become tangible.
Have someone whether it be a colleague, family friend, accountant friend or a financial firm, help you navigate the complicated financial landscape so you stay on top. Don’t be afraid to ask for advice or help when it comes to managing your money
As a startup, you are embarking on something that will impact not only your future but the futures of many. All businesses started with an idea and some money. Money is not the answer to the world's problems, but if respected, it can be a critical tool to building your vision into a reality. Take time to learn what areas you are the most profitable, have the business save some money and make sure you've got someone great to help you with it all. Do these things and work hard. My hope for you is that you leave a legacy bigger than you ever believed possible.