Financial dangers for a startup company

There are financial dangers to starting up a company, a business of any size, or investing in assets like real estate.

Let’s look at the financial dangers in getting a company started and then look at ways to avoid those potential problems. Here is a summary of some key financial dangers in starting a company:

PLANNING PHASE

• Starting too soon
• Not estimating start-up costs
• Optimistic sales projections

BRICK AND MORTAR PHASE

• Lack of accounting – bookkeeping
• Taxes not reported
• Capital is tied up – no cash flow
• Credit gets maximized too early
• Unexpected sales dip
• Unforeseen circumstances

• Customers not serviced well
• Competitors make adjustments

Getting a business idea and planning it thoroughly using market research that includes industry research is often a rushed phase. Take time in the planning phase and run different scenarios including an exit strategy that gets responsibility and financial liability off your shoulders.

Plan the business thoroughly and write a mission statement. Do this even if the business is simple or you decide to sell Avon, for example. Your money is on the line and so is your reputation.

Starting too soon

If money is tight and the business idea seems like it’s the best one around, the temptation is to get started right away and get money or cash flowing in. Wait. Did you plan well? Or did you cram? It’s like taking a test in school.

• Do you know how much money you might really make from your venture?
• How great is the franchise you’re investigating?
• What problems do other franchise owners experience?

A software company that needed my marketing help had invested tens of thousands of dollars on its coding. Several software engineers were paid to finish the product for testing in the BETA phase. This included some early stage sales. Exciting! The day came for me to sit in front of a potential client that was eager to buy the software – nothing happened.

The company was under pressure to roll out the product too early. They thought they had all the problems fixed, but they were wrong about the effectiveness of their product. Even though they talked down the competition, they made the competition look better.

A complex business requires a complex business plan and financial projection – especially if a prototype is being built and investors are needed. So if a friend offers space rent free so you can start up a coffee shop, you don’t have to worry about start-up costs, right?

There’s inventory . . . and inventory management to consider: How much coffee will you buy ahead of time, what flavors, and how much decaf versus thirty different types of caffeinated coffee.

Starting a small home improvement company? How’s the truck operating? What tools are really needed? How’s the quality of work? Are the licenses and worker’s comp insurance accounted for?

Optimistic sales projections

The software company I mentioned earlier had their sales projections all figured out for the next few years. They did do their research or due diligence; they really did. But since the prototype was off they started off behind their projections. They also didn’t realize there were customers who were more loyal to the competition than they realized.

Overhead is too high

Determine your overhead even if it is a home-based business. Simple businesses may even include “soft” costs such as taking off for vacation.

This phase is when the operation is rolling along and business decisions have to be made. During a start-up phase with a marketing company, we made the decision to move out of separate homes and into a small office which was a good decision. The business infrastructure has to be in place.

Lack of accounting – bookkeeping

When expenses aren’t reported, invoices aren’t tracked, and income isn’t entered the financial data gives an inaccurate financial picture. This alone is a financial danger because this will impact the amount of time needed to report taxes. It will also affect whether taxes are reported accurately. The business owner also doesn’t understand how much money is really being made.

Something as simple as tracking income and expenses is quite difficult for most people – especially small business owners and solo entrepreneurs who are exhausted after running their business all day or all week.

Hire a bookkeeper even if it’s only for two or three hours per week – or even if it’s only for three to five hours per month.

Taxes not reported

Report taxes accurately and properly. Log on to irs.gov and click under the tax section for businesses. There’s terrific information available.

Capital is tied up – credit is maxed out

If credit and capital are unavailable, then sales have to be made. There’s no other way. Cash has to come in to the business instead of flowing out. Or equipment has to be sold off. Make sure enough capital is available and enough credit is available to sustain the business until the initial sales cycle kicks in. Do not use up 100% of available capital and credit.

Employees steal and sue

Employees are necessary and so are independent contractors. But employees may decide to steal or sue. Provide an employee handbook that details what they need to know.

Unexpected sales dip

Sales may dip unexpectedly. How can that happen if economic trends occur over a long period of time. Remember 9/11 (September 11, 2001)? I know a woman who had a successful quick printing business near Beverly Hills. She had among the highest sales for her franchise in the U.S. She was in the printing business and 9/11 cut into her sales quickly and within six months her sales had dipped so low that she could not sustain her overhead. She closed her doors.

Unforeseen circumstances

See above. Terrorist attacks and natural disasters can be real bummers for a start up company that has maxed out cash and credit.

Once sales occur, the customers must be kept satisfied. For a clothing store, this means making sure the customer is satisfied and has a positive experience. In a coffee shop, ask if the customer likes the coffee. Thank them and invite them to come back.

For a service company like a web development company, communicate with the customer at each phase of the operation.

Customers not serviced well

If customers are not serviced well, they may not come back and they may tell others to not do business as well. On the other hand, if the customers are serviced well then they may return and tell a few others to join them.

Competitors make adjustments

Don’t underestimate the competition. The software company I mentioned earlier really felt they had no competition. They knew their product was superior and I believe it was. But they struggled to complete the BETA phase and they did not take small brand loyalty in to account. Or, they forgot that users get used to certain software and they don’t want the latest and greatest – they only want basic functionality.

Let’s say you’re doing well and cleaning up the competition. But then they make adjustments and begin improving their service. You can’t help that completely. But if their adjustment happens soon, then they can catch you unaware.

Reducing Financial Dangers for Start-Up Companies

• Running a business means solving problems
• Here’s what to do to reduce the risk of financial dangers when starting a business:
• Plan thoroughly for many types of scenarios – good, bad, otherwise
• Make sure the target customer really wants your services
• Communicate well with employees and put policies in writing – even a few pages

• Do not max out credit or cash under any circumstances – if sales aren’t on the near horizon then the business may not work out, or don’t sleep until sales are made

• Keep expenses low – determine which expenses are strategic such as paying for a bookkeeper

• Keep customers satisfied and offer incentives for referrals