The financial world doesn’t come naturally to everyone- even for startup founders. Having worked with both early-stage and late-stage startups across various industries such as health tech, SaaS, food and beverage, and more, District Advisory has seen founders make the same common mistakes over and over again.
Here are the top 10 common mistakes that startup founders make when it comes to managing their company finances.
1. Blurring the line between personal and business purchases.
Many founders use their business cards to make personal purchases and vice versa. This makes your startup financials much more complicated than they need to be and can be expensive to go back and correct. Avoid this mistake by opening a business bank account and resist the temptation to use your corporate cash for personal gain.
2. Not completely understanding their product and market place before trying to scale.
Founders not only need to fully understand their own ideas, but they also need to do the continued due diligence necessary to really understand their competitor’s ideas and market place. This is very important for creating financial projections, creating market-size estimations, creating budgets, fundraising, and more. Use databases such as Pitchbook to find the information that you need.
3. Blind pricing products.
Many founders arbitrarily choose their product prices. But, you will be much more successful by doing research into what other companies that are similar to yours are charging or even speaking directly with your customers. What are other companies charging for similar products? What are your customers telling you that they are willing to pay?
4. Not fully understanding how much to raise and how to raise it.
Be careful not to underestimate just how important strategy and a deep understanding of the legal and financial aspects of fundraising is. Make sure your deal terms make financial sense and do not give too much equity away for too little, too soon. This can potentially have huge negative impacts in the future.
5. Not structuring the entity for tax purposes from the beginning.
It is important to choose the structure of your business entity early on and with intention. Each structure has its own set of positives and negatives and has different tax implications. Choose your entity carefully based on your short term and long term business goals, as well as your personal comfort level with personal risk.
6. Not setting realistic short- and long-term financial goals.
Failing to set realistic finance-specific goals for both the short-term and the long-term can cause your business a lot of problems. You need to set goals that are achievable while still allowing your business to grow, otherwise you may grow slower than anticipated or struggle to keep your startup open altogether. Consider cash flow goals, fundraising goals, and exit goals.
7. Trying to DIY their taxes and accounting.
It is much more expensive in the long run to hire someone to backtrack and correct three years of poor DIY accounting work than it is to hire someone who is an expert from the start. Avoid mistakes and potentially getting into legal trouble due to inaccurate record keeping by doing it right the first time. Hire a professional or find someone who can train you on QuickBooks to get you started.
8. Not establishing their accounting processes early on.
Many founders fly by the seat of their pants and take one day at a time. While this flexibility and knack for rolling with the day to day punches are often what makes founders successful, founders must also remember to set up processes that will help carry them into the future. There will come a point in time where founders will no longer be able to handle their accounting manually. Having a process in place for when that moment arrives will ensure that you are able to hand off tasks without troubles since the process will be standardized. Processes will also ensure consistency so that nothing falls through the cracks.
9. Not valuing long-term relationships.
As you begin to grow, you must look for those with whom you feel trust. Your accountant will know the intricate details of your business and will be responsible for an extremely vital component to your business. You may even lean on your accountant for their expertise and guidance for growing your business. You want to look for someone that you feel you can grow with and have a long-term relationship with. This applies to any other professional services you might need like legal as well.
10. Not properly registering in the states they are operating in.
You must make sure that when you start a business that you properly register for each state you plan to operate in. Not just at the state level, but also at the county and even city level. Forgetting to pay certain taxes or not having the proper permits to operate your business in a particular location can have serious and long term repercussions.