When you’re striving to maintain steady revenue during the bumpy first 12 months of business, certain financial mistakes can be devastating.
In fact, according to ICTSD, one in three Australian small businesses fails within the first year. This often happens due to money mismanagement.
Sure, in a ruthless, competitive market, it’s easy for financial stumbling blocks and obstacles to appear seemingly out of thin air.
That’s why you need to know exactly how to handle your fledgling business’s finances and give your startup the best possible chance of survival during the challenging first year.
I hope these pieces of advice can help you succeed in running your own business and achieve all of your long-term goals.
Table of contents:
- Choosing the wrong office space
- Taking on too much debt
- Taking on too many expenses
- Not separating personal and business accounts
- Incorrect pricing
1. Choosing the Wrong Office Space
Finding the right office space requires a good amount of forethought.
Ask yourself, “What are my realistic space needs?”.
Many business owners make the mistake of renting too much space than they actually need or for longer than they need.
Or, they pay for an expensive brick-and-mortar office when they have the ability to run their businesses remotely and avoid the hefty price tag and ongoing costs.
While there’s a lot of temptation to get a traditional fancy office for your fledgling business, there’s no justification for leasing expensive office space – especially when more affordable options are available.
What to do instead: Rather than getting trapped into expensive, long-term commitments, consider short-term office leases.
They are cost-effective, require little investment, and give you the opportunity to protect your revenue growth and quickly scale up without incurring significant costs.
For example, a flexible virtual office provides your business with the right tools and services to run properly and build a stellar reputation with packages starting from as little as $40 per month.
Considering that the average price for office space in Melbourne is $640 per person, that’s a huge price difference, isn’t it? Needless to say, every dollar you save provides you with the opportunity to invest more in your business’s growth.
2. Taking On Too Much Debt
Far too many startups have failed due to their inability to pay off the debt accumulated.
Sure, building a business from scratch often means getting into debt.
Honestly speaking, debt plays an important role when it comes to securing financing for your fledgling startup.
Unlike equity financing, venture debt can be obtained much more quickly, allowing a business to secure the right amount of capital.
However, when you take on too much debt, all your excess cash must go towards serving that debt.
Worse, if you don’t have the money to pay off debt, you can quickly find your business in the danger zone.
What to do instead: Taking on too much debt comes with short-term and long-term financial burdens on your company, and can get you into trouble.
As a general rule, you shouldn’t expect to take on more debt than your business’s annual revenue.
Otherwise, the cost of debt may rise above the cost of equity, and the probability of defaulting on debt increases.
So, as a startup owner, it’s best to think in smaller financing amounts that have the ability to grow over time (rather than thinking in large sums of money).
Avoid taking on more debt than you actually need and be sure you only take “good debt” (that can be considered as an investment).
3. Taking on Too Many Expenses
When you’re building a business from the ground up, every dollar counts.
Yet so many business owners waste money on unnecessary expenses, such as flashy new laptops, expensive business dinners, too many employee perks, etc.
Extraneous spending can hurt you twice – once because you wasted precious money and a second time because now you have less to invest in those areas that actually help your business grow.
Let’s get back to the first section of this post (“Choosing the wrong office space”).
If a cost-effective virtual office provides you with everything your business needs to run smoothly, why should you splurge on expensive office space that’s eating your revenue?
Outside of spending money on unnecessary office space, another mistake that small businesses make is hiring too many full-time employees too soon.
Overhiring is dangerous to your business’s finances. Not to mention, it’s one of the hardest mistakes to undo, due to the emotional side of layoffs.
What to do instead: First and foremost, it is important that you make the difference between “needs” and “wants”.
“Needs” indicate something your business must have for survival, while “wants” indicate something which is nice to have, but not essential for survival.
For example, having a professional business address is an essential requirement (a “need”) for your business as you have to build a legitimate and trustworthy business image.
On the other hand, having a 2000 square metres office even if you are able to work remotely with just a handful of employees is definitely not essential for your business’s growth (a “want”).
Also, before hiring a new team member, ask yourself, “Do I really need an in-house employee? Are there more convenient options, such as outsourcing or working with independent contractors?”
For example, instead of recruiting, training and hiring an in-house receptionist, you may want to consider the services of a virtual receptionist.
Just like an in-house receptionist, a virtual receptionist guarantees that your customers’ calls will be handled with professionalism, but for a fraction of the cost.
4. Not Separating Personal and Business Accounts
Once your startup is up and running, it is essential to take steps to separate your business and personal finances.
Many small business owners tend to commingle business and personal funds. For example, they use their personal bank accounts to pay bills and deposit payments for their businesses.
There are three main reasons you should draw a line in the sands of finance and separate business and personal expenses:
- Mixing your business and personal funds makes it harder to tell how your business is actually doing – especially if you use your personal finances when your business needs a boost or your spouse is bringing in lots of money.
- When separating your business and personal finances, it is easier to keep track of business expenses for tax purposes.
- Establishing firm boundaries between business and personal finances is also important for your personal liability. For example, you do not want to end up signing personal guarantees for loans or leases and make yourself personally liable in the unfortunate event that your business gets sued.
What to do instead: Keep your business and personal funds separate from the get-go.
Pay yourself a regular salary that can be included in your business’s operating expenses.
Even if you are operating as a sole trader and don’t need to have a business bank account, it’s a good idea to separate your business and personal expenses and make your finances much easier to manage.
5. Incorrect Pricing
One of the biggest challenges for any startup is pricing.
If you set prices too high, you risk pushing potential customers away. If you set prices too low, you risk cutting profits.
Not to mention, the lowest price doesn’t always win (as suggested by a study published on ScienceDirect).
Many small businesses leave money on the table and face financial challenges due to incorrect pricing.
This typically happens when they see price as the $ number given to a service or product based on the marketplace or costs (and not based on customers’ perception of value).
In fact, the serial entrepreneur Steve Blank warns businesses against pricing a product based on development costs.
The cost-plus pricing method can seriously harm your business as it limits your ability to use price segmentation and does not enable you to sell value.
Not to mention, cost-plus pricing doesn’t allow you to set prices based on what the market is willing to pay – which could result in a low profit margin.
What to do instead: There are lots of tips about product pricing out there.
The most important factor to consider when deciding how much to charge for a product is that your price has to sustain your business.
If potential customers don’t buy because your high prices scare them away, you lose market share. If your prices are too low, you’ll be selling at a loss.
To maximise profits, be sure to set your prices according to the perceived value of your product or service.
In addition, the value-based pricing method enables you to increase the value of your brand and make customers perceive your products to be of superior quality.
When a value-based price genuinely reflects the value of what you’re offering, this pricing method is likely to increase customer loyalty as customers believe they are getting the best product at the best possible price.
Conclusion: With so many factors to consider when building a business from the ground up, there is a great deal of potential for error when it comes to managing your business’s finances.
While your first year of entrepreneurship is likely to be a rollercoaster, these five tips will help you be conservative in your spending so you can set your new business up for success.
Want to turn your small business into a money-making machine that actually pays you? Then let B2B HQ take the overhead burden off your plate so you can focus on what matters most – that is, your business’s cash flow and growth. Get your virtual office in Melbourne today and see for yourself how much it can help you save on overhead – all while allowing you to appear larger than you are and build a stellar reputation!