Common Money Mistakes Entrepreneurs Make (And How to Avoid Them)

May 24, 2016

9:18 am

Money matters are among the most common pitfalls even the most successful entrepreneurs face. Even if you have made it through the initial stage of your business (congrats!), it doesn’t mean you should now lose the grip over your personal and business cash flows. You might be no accountant or CFO, yet it’s worth knowing and addressing the next money mistakes if you want to succeed with your company.

Focusing on the Topline Rather Than Bottom Line

What is your first reaction when you hear that a competitor has just increased their monthly revenue by $10.000? Most probably, your first urge is to figure out how you can top that. The truth is – most entrepreneurs are notorious braggers. While they tend to share massive wins, they prefer to leave some valuable details of the process under the covers.

Your true strength when it comes to finances should lie in protecting and multiplying the net profits, rather than chasing the higher revenue dollar. Is there a way to automate or optimize existing business processes? Can you cut down on office expenses or get higher tax deductions? These are the most valuable questions you should be asking yourself.

Failing to Assess the Risks

Whether you are bootstrapping or just closed a hefty seed round, your finances will stay at risk during the early stages of your venture. If fail to manage the key risks here, there will be gaps, which may pose serious threat in the future. The most common ones can be grouped into the next categories:

Product risks. Before going all-in make sure you did your market research part well, scoped the competition, tested your minimum viable idea and made sure there’s enough interest in your product in the first place.

Market risks. Is your target market large enough or are you trying to pursue a micro-niche? What about the competition – is the market oversaturated or under-developed (which might be not a good sign either). Are you pursuing a long lasting trend or a bypassing fad? Invest heavily in researching your target market prior to committing to launch.

Lifestyle risks a.k.a. making money decisions with a potential negative impact on your lifestyle. Both freelancers and entrepreneurs are often guilty of neglecting health insurances, getting high-interest loans for the sake of pursuing a dream venture or being buried under credits due to the decision to scale faster than needed. You should carefully assess each and every personal financial decision you are about to make and think of the potential consequences. Always have a backup plan and a financial safety cushion in place for the rainy days and possible mishaps.

Execution risks. Once your company starts getting traction you may find yourself lost in the myriad of details that need your immediate attention. As a result, you lose sight of the overall company trajectory. Eliminate the Super (Wo)Man syndrome and keep your focus sharp on what’s truly important. Don’t get buried in the routine, which can be outsourced, and make sure you steer your company forward, rather than going in circles.

To help you manage the risks more efficiently, you can adopt the following framework:

RiskFramework

Failing to Achieve the Right Value Equation

The two biggest forms of capital in business is your mental capital (your product and service expertise) and relationship capital (your end-users, platform, clients, organization, friends and family).

Mental Capital + Relationship Capital = Financial Capital.

When those elements are well balanced, your venture prospers. Yet, when those are not aligned well enough, your start to sink gradually. Here are a few simple examples: a hairdresser, who attempts to sell real estate investment on side won’t likely make any good profits. When the value proposition fails to match the specific audience, things will rarely go well.  Also, when an entrepreneur is living beyond their means and tries to run the company like a treadmill as means to sustain their lifestyle, no good outcomes are likely to happen.

Seek the right balance, assess carefully all the involved risks and keep your focus sharp on this that matter if you’d like to stay on top of your finances and keep your company prospering!

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Dianna is a former ESL teacher and World Teach volunteer, currently living in France. She's slightly addicted to apps and viral media trends and helps different companies with product localization and content strategies. You can tweet her at @dilabrien

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