THE TOP THREE FINANCIAL MISTAKES OF A SMALL BUSINESS STARTUP

Many entrepreneurs start their businesses with detailed plans on how they’re going to start, manage, and operate their business. Some even have detailed financial projections on how they’re going to make and spend their money. As consultants helping small business owners to start and grow their businesses, we see many successes but also some failures. We’ve noticed three common mistakes that can make or break a business in its first year.

Underestimating the amount of startup capital needed.

Just like estimating costs when you remodel a house, my rule of thumb is to estimate the amount of startup capital you will need and double it. While loans for startups are available, it’s harder to get a loan when you’ve already started and run out of cash. By then, you may be showing a loss on the books which a lender will have to take into account when you apply for a loan. It’s possible that you forgot certain expenses or contingencies when you estimated the amount you’d need to start, and an emergency fund is essential.

Not paying yourself.

Believe it or not, many business owners have detailed projections covering every possible expense except their own salary. Some say they won’t need to take a salary until they’re established, but two years later they’re still unable to pay themselves. Make sure you figure the amount you’ll need personally when you calculate expenses.

Unrealistic revenue projections.

Remember that when you open on Day One, you won’t have an established customer base. It may take months before you’re fully operational with anticipated sales. Even then, some business owners have expectations that are too rosy. Base your revenue projections on research, including first-hand research, into the customers in your area and the experience of other business owners. Never base it totally on the target market population or drive-by statistics. I always advise potential business owners to figure two sets of financial projections: what they expect to happen, and a worst-case projection considering what could happen. You can expect the first, but plan for the second. If you can break even then, you will be prepared for most eventualities.

As always, contact us at (678) 466-5100 if you need assistance. By Alisa Kirk, Area Director, UGA SBDC at Clayton State University