According to data gathered by the Bureau of Labor Statistics, approximately 20% of small businesses fail within the first year, 30% by the second year, and 50% by the end of 5 years. Considering small businesses account for around 99% of all business in America, that’s an enormous number of failed ventures. Unfortunately, many of these failures are a result of poor planning, execution, and financial awareness. With this in mind, we take a look at the five financial constraints facing startup businesses.
High Overhead Costs
Overhead costs are recurring payments including rent, utilities, payroll, subscriptions, and ongoing maintenance of essential equipment. Many budding entrepreneurs expect sales to be high within the first year, so they build an infrastructure that can deal with the demand. However, the reality is that until you’ve got data to back it up, you have to expect low levels of trade and keep as much cash in hand as possible.
This doesn’t mean you can’t have access to the tools you need, it just means finding alternative ways to deal with busy periods. For example, instead of buying machinery and vehicles – like forklifts – you can rent them from a reputable Komatsu Dealer in St. Louis. Machinery and vehicle rentals mean you only have one cost to worry about.
Inaccurate Bookkeeping
If you don’t keep track of the books, you’ll face significant issues later on because you’ll have no way to see where you went wrong. Fortunately, there are plenty of low-cost accounting systems that will make book management much easier. Alternatively, you can hire an affordable but professional accountant to take care of this.
No Clear Financial Goals
Many startup business owners get carried away with heavy spending right at the start, but then they’re faced with issues when they don’t reach financial milestones. To avoid these issues, it’s essential to work out careful estimations of how much the business will spend and what it – realistically – expects to take.
If your budget is too tight during the planning stages, you’re bound to overspend when it comes to execution.
Overspending
Using money like liquid isn’t the best course of action for a startup business owner, but that doesn’t stop them from buying expensive office equipment, flashy furniture, and splashing out on business lunches. When you first launch the business, every bit of spending needs to benefit the business. If you track your spending and reduce unnecessary areas, you’ll be surprised by how much more liquidity you’ll have.
Letting Upfront Payments Slip
Every startup business owner knows that building a customer base is essential in the beginning, but it’s important not to get lost in a frantic panic and provide services without payment upfront. If you travel down the road of fulfilling services before retrieving payment, you’ll find it difficult to exit, and will likely go bust as a result.
The majority of startup businesses fail because of poor financial planning and management. Now that you understand the common financial constraints facing startups, you can put measures in place to avoid adding your business to the pile of failures.
