Depending on the source, anywhere from three quarters to ninety percent of startups fail in the first few years. And the clear majority of them fail due to financial mistakes, whether they improperly price their product or spend all of their financial reserves before they reach the market. Here are a few tips on how startup businesses can easily avoid financial instability.
Control your baseline expenses
Many startups look at ways to control one-time expenses like funding a marketing blitz by focusing on viral videos and social media buzz. What they too often ignore are their baseline expenses, the costs they have to pay month after month regardless of the amount of money coming in. They add people regardless of whether they’ll generate enough revenue to offset their payroll costs instead of looking for contractors to offer specialized services for the specific timeframe required.
You need to keep your finances lean at all costs. Don’t buy a bunch of inventory and don’t order 100,000 units unless you have orders for that many. Barter wherever practical to conserve cash. Look for joint marketing or facility sharing opportunities.
Focus on monetization – immediately
Many startups focus on designing a “perfect” product and ignore the process of educating the public about it and how they’re going to start selling it as soon as it is ready to go. They have an idea for a service, but they explore multiple business models when they need to lock in sales. Instead, look for ways to generate cash flow as soon as possible. Crowdfunding your product development while those donating the money secure the first production run is one option. Showing your prototype to large retailers to secure your first orders is another. If you’re producing food products, try selling them in small batches made in a commercial kitchen to restaurants and friends to raise money while you try to secure large orders.
Take care of yourself
First, don’t quit your day job until you have a solid business plan and have made progress toward making money with the product or service. Too many people quit their day job and load up on debt with the incorrect belief that the desperation to succeed as bills come due increases their odds of success. Instead, the high-risk situation increases the odds you’ll make bad decisions because you need to make the rent for both your family and the business. This is what drives many to offer equity to office staff and janitors instead of paying payroll, though this limits their ability to sell equity to serious investors later.
Don’t go deep into debt to start your business, whether the debt is in your name or the business’ name. The debt payments constrain cash flow in the future while hurting the book value of your business. If your business is failing, don’t compound the literal cost of failure by borrowing against your home to try to keep the business going. Have a set timeframe or financial hard stop at which you will kill the business and move on to something else. This gives you the opportunity to try something else later.
Third, secure and maintain the relevant insurances. See insurance as financial hedging against the worst. Property insurance protects your business in case of theft or fire. Liability insurance prevents a lawsuit from wiping you out.
If you follow these few tips, you’ll be able to build your startup on more stable ground. Conserve cash, keep your mandatory monthly expenses to a minimum and focus on how you’re going to make money as fast as possible, even if you’re developing a major product release. Have tactics on hand to turn your business around if it starts to fail and have an exit strategy in place so that you’re able to walk away from a failing business instead of letting it wipe you out totally.