Budget Pitfalls That Can Ruin Your StartupBrian Jang ON August 21, 2018
As your new business first takes form, you will likely be focused on your long-term vision and goals. That is perfectly understandable, and this is often what makes the early days of your enterprise exciting. It is important, however, not to lose sight of something that is critical to your success: budgeting.
By focusing on what you hope to build and not focusing enough on what is happening right now, you are laying the groundwork for numerous potential problems down the road.
“What problems?”, you may ask.
Here are some of the common pitfalls that you should be watching for.
Not Creating a Budget
A surprising number of businesses don’t even make a budget for themselves, and this is setting the groundwork for tremendous difficulties to come. Although you are undoubtedly occupied with a long to-do list, it is imperative that you create a budget.
Be realistic in your projections and budget. This may make it somewhat harder to fund certain projects, but it is more honest and will provide you with a solid, profitable plan to follow.
Not Seeing to Your Immediate Needs
If your planning suggests that it will take $8000 to bring a new product to market, do not seek $5000 in funding. You will find that investors these days are quite savvy and will not want to invest in something that is doomed to fail without further funding.
Underestimating Labour Costs
It is normal for a new business to experience higher employee turnover than businesses that are more established. As a result, you can expect to pay more for recruiting and training, and this can add up to a considerable amount. Attempting to attract top talent will also be a drain on your budget, as top talent requires top salaries.
Further, there will be considerations such as severance payments, and in some cases the dismissal of an employee might lead to a lawsuit, driving labour costs even higher.
Not Having a Good Grasp on Fixed and Variable Costs
It is difficult at first to accurately predict costs and the way they might fluctuate. New business owners will often fail to account for fixed and variable costs in their revenue predictions. Two areas that are easy to underestimate are labour and materials.
Budget with fluctuations in mind, allowing yourself some flexibility to react to unexpected expenses that may present themselves.
Not Understanding Cash Flow
Understanding cash flow is critically important to the success of your business, and yet, many new business owners are not as comfortable with this aspect of their business as they should be.
In virtually every transaction, there will be a delay between the completion of the deal and the actual receipt of payment. This is entirely normal and isn’t really a problem in and of itself, but if you develop the habit of spending money before receiving it, you are setting yourself up for trouble.
Cash flow is likely the most important point to be aware of.
It is easy to lose sight of certain things in the early days of building your business, but your budget must not be one of them. Certainly, it is not as exciting as developing your vision for your business, but it is just as important, if not more so.
Be sure not to allow your business to be derailed by failing to plan your budget accordingly.