Why Startups Fail at Financial Planning, and What Founders Can Do

By Fernando Berrocal

Some aspiring startup entrepreneurs mistakenly believe that their success depends on how fantastic their initial idea is for a business. For them, this idea will convert into the development of an outstanding product; this product will put them in an expected waiting position in their industry. However, you must know–even if you have an outstanding business idea in your hands–you will eventually fail if you don’t apply comprehensive financial planning to manage your upcoming business. In this post, we will go over business failures related to financial planning–and our suggestions to turn things around.

Financial Planning

According to startup research done by CB Insights, out of more than 110 analyzed business failures, the top-cited cause of failure was a business running out of money in its operating days. This sole cause was responsible for 38% of the startup´s failures. Other significant factors to consider (such as cost and price concerns) were also mentioned in 15% of small business failures. In retrospect, even if you have some first significant success, your organization won't survive if you can't handle your startup finances appropriately. Fortunately for you, it's easier than you would have thought to make things right–and position your business in a more profitable and sustainable position.

So, why so many startups struggle with financial planning is the main issue that must be addressed.  Any aspiring startup entrepreneur could be an expert in their particular industry –perhaps they have created a fascinating new product and/or service. However, that doesn't mean they can calculate the precise costs needed to turn a business plan into a reality. Planning and managing finances correctly may take some research time. Even financially savvy business owners occasionally put their money in the second position due to the overwhelming number of other obligations they already have.

Financial planning frequently fails since it is not given the attention it requires.  This can be due to a lack of information, willingness, or time. As their startup expands, new entrepreneurs are particularly prone to making costly errors. As a result, there are a few essential things that every startup founder should consider as they scale their enterprise.

Venture Capital

  1. Create a budget plan when establishing new objectives. 

A business owner will set growth objectives at any stage of the organization's development (from its initial conception of it to being a mature business). Nevertheless, they must spend even more money to meet these growth objectives. A business that was previously performing well might ultimately crash if you try to expand it up too rapidly without sufficient budgeting to accomplish that. You may accomplish sustainable scaling by completely integrating a budget with clearly stated growth objectives.

  1. Make a "cash burn" calculation.

There are both fixed and variable costs in any type of business–startups have certain particularities. Even if you run your business from your own home, you'll still need to pay different business costs, such as your rent for office space, the different utilities you will utilize, and any software or contractors you need to keep your business running smoothly. Many business owners don't take the time to fully comprehend how much they spend every month, even though these figures may mount up quite rapidly.

Calculating your cash burn should be your top priority for you, your startup team, and your business as a whole. This should happen since it will show you how much revenue you need to generate to keep the firm operating. You will have a clear, realistic estimate of how much you need to earn to break even when you begin your financial planning by estimating your monthly costs.

Why Startups Fail at Financial Planning

  1. Don't make a hire too soon.

Human capital is the most significant resource available to any sort of organization. In that same scenario, this resource is also one of the most expensive, though. It's also commonplace (more than what can you expect) for a business founder to want to recruit full-time staff after it reaches a certain degree of success to help handle important duties or to support further expansion. However, businesses that make these personnel decisions in a hurry risk suffering large financial losses. Consider outsourcing part of your labor to contractors or employing automation technologies in some situations rather than trying to quickly increase your team by making full-time workers on all fronts. This may save you a significant amount of money, while providing more time to work on more difficult or time-spending things.

  1. Give an opportunity to competent professionals.

As was already said in the paragraphs above, the typical startup entrepreneur is not a specialist in financial planning–founders truly don’t have to become experts in that field. The main founders of startups frequently have a strong do it yourself mindset (DIY), which might make them hesitant to receive important assistance. They could consider financial planning from a professional as just another important expense–it’s also an opportunity for the founder to learn from a real expert.

In actuality, hiring specialists to handle your financial duties will be considerably less expensive than doing financial planning on your own and making a terrible mistake in the process. Even if a small business might not require the services of a professional such as a Chief Financial Officer (CFO), it can nevertheless gain substantially from outsourcing accounting, bookkeeping, and other crucial financial management activities to reputable financial experts in the business. Making educated decisions requires having correct financial information, which must be guaranteed.

You already carry a heavy load as the founder of a startup. However, this does not diminish the need for financial preparation. You may position yourself for long-term security and success by making finances a crucial consideration in all decision-making.  Remember: recognize when to delegate tasks to experts!

Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.

Pre Seed Startup Investor

About Us

Started in 2000 in Washington DC, Masslight has served the DMV for 18+ years. We serve enterprises and startups with full-stack development and long-term project management services.

Contact Us

masslight logo
©2019 MassLight Inc.
Website by Oneness Co-Creative