3 Startup Finance Pitfalls... and How To Avoid Them

If you run out of cash, your business dies. Don't become a statistic! In this Journey John shares 3 early-stage finance pitfalls to avoid.

John Ladaga
John Ladaga
Co-founder @ Sturppy

Every company from Fintech startups to mom and pop hair salons needs cash to survive. Cash is the life blood of every business and it's surprisingly easy to run out of cash if you're not careful.

"Running out of cash/failing to raise new capital accounts for 38% of startup deaths" - CBInsights 2018

There are 3 early-stage pitfalls that startups often fall into that lead to their death by lack of cash. As a founder I've bootstrapped companies and raised money from VC's; the principles and pitfalls below apply the same none the less.

3 early stage pitfalls in startup finance

Let's dive in and explain what each of these are, why they're important, and how to avoid them!

Pitfall #1 - Not knowing what numbers to look at

As an early stage startup there are 3 things you should know:

  1. Your bank balance for your business
  2. The money coming in to your business
  3. The money going out of your business

The beauty behind these 3 things are that they aren't difficult to understand or hard to obtain. You don't need fancy software or a fractional CFO. All of these can be found and tracked via your bank statements.

Using just these three things you can calculate 3 very important KPIs:

  1. Burn rate
  2. Runway
  3. Growth rate

Your burn rate is simply the money going out of your business minus the money coming into your business over a period of time.

Two quick things to note when calculating burn: 1) your burn will change over time. Do not fall into the trap of thinking that your burn is constant. 2) do not try to fudge your numbers...be honest with yourself, if you fudge your numbers to make yourself feel better you're only hurting yourself and likely your colleagues/employees!

Burnrate early stage startup

Ruway uses your burn and your bank balance to measure how long your company has to live before runniong out of money.

early stage startup runway

Growth rate or in this case Month over Month (MoM) Growth rate measures simply how much more money you're bringing into your business each month than you're spending.

We've all heard of and seen the infamous J-curve or hockey stick curve right? Well, if you keep your MoM Growth rate constant over time, that's how you achieve the J-curve. Constant Growth rates have compounding effects.

how to calculate your growth rate in startup

Pitfall #2 - How often should you look at the numbers?

As a founder you're constantly juggling a hundred tasks at once. It's common for founders at the beginning to look at their numbers, calculate their runway, know their growth rate, and then put those numbers on a shelf - entirely forgetting about them for months at a time. Don't make this mistake.

Your numbers are going to change over time - they will sneak up on you and surprise you if you are not careful. To be sure you're financials are in good shape, you as a founder should be checking these numbers every week at a minimum.

startup finances

When anyone asks, you should know your numbers!

Pitfall #3 - Under-representing your expenses

It's common for early stage founders and co-founders not to compensate themselves when they're first getting the business off the ground - I get it, I've been there!

You're also likely doing things that don't scale and that's eniterly OK! But It's important to remember these things when thinking and talking about the overall financial health and profitability of your business. Excluding things like executive compensation and doing things that don't scale can be missleading when calculating KPIs like your Customer Acquisition Costs.

It's also important to remember that your expenses are going to change over time; so to will your paid acquisition costs. As an acquisition channel becomes saturated, the costs will NOT remain constant - they will rise, that's just a fact.

startup expenses

Again, not to beat a dead horse here but if you under-represent your expenses and fudge your numbers, you're just hurting yourself! Be truthful to yourself with your numbers.

In summary

If you run out of cash, your business will die. It's easy to run out of cash unless you do the following:

  1. Know the 3 big numbers: bank balance, money in, and money out
  2. Use those numbers to calculate your burn, runway, and MoM Growth rate
  3. Check these numbers on a weekly basis
  4. Be truthful to yourself about your numbers and don't under-represent expenses

If you do the above, you'll greatly improve your chances of growing your startup into the success you've been dreaming of!

If you've enjoyed this post and are looking to learn more about startup finance and growing an online business, give me a follow on Twitter @jj_ladaga!