7 Financial Pitfalls to Avoid With a Growing Startup

Written by Amanda Bower    |    Published: November 14, 2022

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financial pitfalls

Owning a startup can be an exciting and rewarding venture, one that ultimately leads to financial success and a glowing reputation within your industry. However, growing a startup is not without its share of challenges. 

Financial decisions can often be the “x factor” to make or break your startup. That being the case, it’s important to clearly identify common financial pitfalls associated with startups and avoid them like the plague! Let’s discuss why most startups fail and 7 mistakes to watch out for as your business grows.

Why Do Most Startups Fail?

There could indeed be any number of reasons why a particular startup fails. Perhaps the entrepreneur overestimates the market demand for their product. Then again, poor investment marketing could lead to a business running out of funds before generating enough forward momentum to take off.

Nevertheless, many startups don’t fail because their owners lack vision or the company’s initial outside investment isn’t large enough. Rather, they fail because the owners don’t truly understand the financial complexities associated with running a business. As a result, they spend up to half of their working hours on administrative, HR, and payroll tasks. While important, they distract founders from focusing on their overall goals and strategy.

So as we discuss the following 7 common financial pitfalls for startups, remember that many of these can be avoided by simply bringing a trustworthy partner onboard who can take some of the load off your shoulders.

Pitfall #1: Unnecessarily Adding to Fixed Costs

Some fixed costs are going to be essential for your startup’s success. For instance, you may need to lease a small office space as your headquarters. Perhaps you’ll need to pay for a company van or hire a software development specialist. Whatever the case, it’s only realistic to expect a sizable chunk of your budget to go towards fixed costs.

What you don’t want to do is add to those fixed costs through a lack of forethought. Just think how quickly those seemingly “small” fixed costs can accumulate: an extra $400/month for bigger office space here, another $200/month for a sleeker company van there, and before you know it, you’re staring serious cash flow issues in the face.

The takeaway here? Always think carefully before you say “yes” to any new fixed cost. More often than not, it may be something you can do without, at least at this stage of your business plan.

Pitfall #2: Trying to Handle All the Accounting on Your Own

It’s important to keep your company’s books in order from the very outset. Many cash-strapped entrepreneurs, realizing how vital accurate accounting is, take a DIY approach to their startup’s bookkeeping

They may reason that at this stage of their business’s growth, maintaining financial records won’t be too challenging. Plus, they’ll be able to keep an eye on crucial business details (like where the cash flows to).

However, once startup owners take it upon themselves to handle the accounting process, they usually discover that it’s much more labor-intensive than they originally thought. It could take hours every day to update all of their records, and even one tiny mistake could add more hours of work to their already loaded schedule.

Instead of dealing with the tedium and frustration of bookkeeping on your own, it may be better to outsource your accounting process to a reputable third-party provider. They can provide a bookkeeping solution that’s not only efficient but also able to scale up as your business grows (and no, an Excel spreadsheet is not a scalable solution). 

They can deliver real-time financial data and insights when you’re mulling major decisions. Moreover, by leaving your accounting needs in their capable hands, you’ll be able to focus on other mission-critical tasks that can’t be so easily outsourced.

Pitfall #3: Manually Handling Payroll

This mistake is similar to pitfall #2, discussed above, in that it involves an activity that may take a lot more time and energy than you’d imagine. Additional dangers are also associated with trying to do payroll “by hand.”

For instance, tax withholdings must be carefully calculated according to each employee’s filing status and W-4 preferences. Tax withholding payments also have to be paid shortly after wages are expended, which can create a lot of extra stress in meeting those semi-monthly deadlines. Failure to comply with these and other payroll requirements could result in significant fees and penalties for your new business.

Here again, the best solution is to simply outsource your payroll to a trustworthy outside provider. At the very least, consider using an automated payroll system that does the heavy lifting for you in terms of calculating tax withholdings.

Pitfall #4: Neglecting to Set SMART Goals

Many (if not most) startup owners understand the importance of setting SMART business goals. That is, goals that are Specific, Measurable, Attainable, Relevant, and Time-bound. 

However, some entrepreneurs fail to set SMART financial goals for their new venture. In doing so, they may miss a golden opportunity to focus their team’s efforts on a particular objective and even attract potential investors to their company.

In simple terms, what gets measured gets done. When you set SMART financial goals for your company — whether monthly, quarterly, or yearly — you give everyone on your team a clear target to aim for.

You also provide yourself with a tangible means of measuring progress and success. In addition, you can use your tracking data to make important growth-management decisions.

Pitfall #5: Overhiring

In this context, “overhiring” can refer to hiring too many people or hiring someone overqualified for current business needs.

Of course, you’ll need to bring more employees on board as your startup scales upward. However, it’s essential to not “put the cart before the horse” by hiring for a role that hasn’t matured yet or isn’t even necessary at the present time. The person you need five years from now is likely not the person you need right now.

The obvious danger in overhiring is the drain it will put on your cash flow during a critical stage of your startup’s evolution, and that’s not to mention the additional strategic and cultural problems that could result from hiring first and asking questions later.

Perhaps the best and simplest way to avoid this issue is to ask probing questions before considering bringing another employee on board. For example:

  • Who do we need right now to take our company to the next level, and why?
  • How would this hire fit into our 5-year plan? 
  • What are we missing out on by not hiring for this role?
  • Can our business realistically support this hire?

Asking the tough questions before you begin searching for a new employee can save you a lot of unnecessary hassle later.

Pitfall #6: Mixing Personal and Business Finances

Some startup owners think that if they’re funding their own business (without any other investors in the mix), they should be able to mingle company assets with their personal assets without any problem. However, this is not sound reasoning, and it could lead to a lot of trouble in the long run. 

For example, such “commingling” could take away your company’s “liability shield” (i.e., the legal component of a corporation or LLC that keeps company debts separate from personal assets). Moreover, you could be leaving yourself open to a world of trouble if the IRS decides to audit you and determines that you owe taxes on company purchases.

What’s the lesson? Always keep your personal and business finances strictly separate.

Pitfall #7: Adopting the “If I Ignore the Problem, It Will Go Away” Mindset

This may not be a purely financial pitfall, but it certainly applies to budgetary issues. For example, what if you’ve subscribed to a SaaS growth platform that doesn’t yield the expected results? 

You certainly don’t want to cut the cord too early, especially if your team is still learning the ins and outs of the software. On the other hand, if a reasonable amount of time has passed and you’re still not seeing any significant ROI, it’s better to cut your losses and take the available cost savings rather than do nothing and hope for the best.

Of course, making other cutbacks may be more difficult, especially if they involve your team members. However, you must make financial decisions that are in your startup’s best interests; the more swiftly you address a glaring issue, the healthier your company will be in the long run.

Avoid These Financial Pitfalls at All Costs

The bottom line? If you diligently avoid the 7 financial pitfalls discussed above, your startup will likely grow into a profit-generating machine. 

And if you need expert assistance on the financial side of things, check out hiline’s professional services, including outsourced accounting. Or reach out to the hiline team today to start the conversation. We’d be happy to answer any questions you may have!

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