4 Common Mistakes Startups Make
Startups are fun. The opportunities feel and are endless.
The autonomy and limitless potential is intoxicating.
How big could this get?
How fast can we grow?
How much money can we make?
Who should be on the team?
How should I schedule my day, my week, my month, my year...now that I'm the boss?
All these aspirational questions are buzz-worthy, and it's worth having fun and dreaming into the "what ifs?"
Yet, the problem is the buzz of this newness mixed with the constraints that come with a startup can distract you from some key elements that are fundamental to the long-term success of your business.
Over the years, we have worked with over 100 businesses at Hoffbeck+Co and have found some recurring problems that continue to show up with new businesses / startups. When you consult long enough, you get the benefit of starting to see the same problem over and over again.
As consultants, at our core, we are problem solvers. We need to be able to spot issues quickly and apply strategic rules, frameworks, and objective standards to assist clients in solving their problems.
I like to view problems like they are all just sitting on a shelf. When a new client starts describing their current problem, I envision myself grabbing that problem off the shelf. I start inspecting it like an object. Moving it around, looking at it from different angles, poking and prodding it. I ask questions to get another angle on what I am looking at. At some point, I learn enough about the problem and usually I find it's like a previous problem I have solved several times before. It becomes just "another one of those." And if it is just "another one of those," then it is solvable.
There are more than 4 mistakes that startups make, but these are the ones I see all too often.
1. Founders don't pay themselves a livable wage
This is a problem for a handful of reasons. For one, your business needs you 100% committed to it. You need to make enough money that makes you want to get out of bed in the morning. If you are making minimum wage, that might work for those days that you are buzzing on your startup. But it won't work when you have a tough day. And you will have a tough day. You need to stack the deck in your favor and pay yourself a livable wage where you don't eventually start to resent your business or your co-founders because you aren't getting paid enough.
The most common question is, "Well, how do I do that if I'm not making any money?" Correct, there are constraints with a startup. Money likely isn't flowing yet the way you hope it will be. I get it. There will likely be a period of time where you won't be able to pay yourself what you are worth, but the goal needs to be to get yourself there ASAP. Far too many times I see new businesses with cash stacked in the bank and still not paying themself enough. Don't get complacent. Come up with a plan or a threshold to when you can start to pay yourself properly. Your company needs you too.
The next question is, "Well, how much do I pay myself then?" Well, how much do you think you are worth? If for some reason you had to take 6 months off your business, how much would you have to pay someone to do what you do? This helps get you in the ballpark. Additionally, how much money do you need to stay interested? Your business needs your 100% effort, and it's worth the extra money it takes to get it.
Lastly, everyone always says, "Well, what about the taxes?" We aren't tax consultants or CPAs, so we refer out for tax assistance. Yet, some of this goes beyond taxes. When you don't pay yourself a livable wage, your profit is inflated. You aren't actually as profitable as you look. Which means, your company isn't as healthy as it should be. When you pay yourself what you are worth (or what someone else would be paid if they did your role), you would see how much money your company is actually making as a profit. I've had so many clients tell me that their profit is killing it, and then I find out that they only pay themselves $30k/year. Then I adjust their profit based on what their wages should be and profit margins drop down to average or even low.
A phrase commonly passed around about building a strong business is: build a business like you are trying to sell it. Because if it looks strong to a buyer, it likely is. A buyer wants to see a true profit that is legitimate and can be expected if they have to pay someone to do what you do. Yes, there are other valuation techniques like Seller Discretionary Earnings that can adjust this, but your strongest foot forward is when you can look like you sound business and show a valid EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Just like anything else in life, when you cut corners, you get mediocre results. You may pay more in taxes, but your books will actually tell a true story about your financial health.
2. Quality bookkeeping isn't prioritized
Your books let you know how you are doing. On top of that, they help you make sure you pay the right amount in taxes.
Quickbooks Online is likely the right option for you. Internally we use Freshbooks and have been happy with their focus on serving the Professional Services industry. We use them for invoicing, accounting, etc.
Too many times I hear the founder is keeping an excel spreadsheet, or they are teaching themselves how to do the books. Don't mess this part up. It's too important. On top of that, save yourself the headache and stress. You can get great bookkeeping for not that expensive. We offer a monthly service starting at $625/mo.
If you don't know the difference between cash basis or accrual basis, then you are a great candidate for asking for help : ) When you ask for help, you stay in your power zone. See the next point!
3. They try to “DIY” everything
Let's be honest. You aren't good at everything. No one is. Stay in your lane and get assistance where you need it.
If you don't, you risk wasting your time or “stepping in it”.
When you do what you do well, that is what adds value to the product or service you create. That is what draws your customers to you.
The "Trinity of Business" framework by Ernesto Sirolli is applicable here.
Every business has three fundamental elements:
1. Someone to manage/create the product or service
2. Someone to sell the product or service
3. Someone to manage the money from the sales
The TLDR here is, no one is great at all three. If you are damn good, then you might be great at two. But you undoubtedly have a bias towards one. Surround yourself with people that can cover your blindspots. More on this another time.
4. They have unrealistic expectations for their budget and growth
Big goals are great! Positivity is where you should live. Yet, don't live in the clouds. Realistic goals bring momentum. You know the satisfaction from crossing something off your list. And also the shame in not being able to. When your goals are too far fetched it only harms you. It builds a belief that you won't or can't do what you set out to do.
In setting your budget and thinking through the amount of money you can make (revenue) and the amount of money you are going to need to spend on a regular basis (expenses), having a dose of reality is welcomed.
Identify a set of assumptions that are based in reality and then model out what those assumptions' ripple effects are. The closer you can get that assumption to the most basic element / detailed level the better. If you have a coffee shop, think about how many people you will get to walk in your shop and the amount of money the average person will spend. Don't just jump to "We plan to do $20k in sales a month." What is that plan composed of? If the average person spends $6 in your shop, then you need 3,333 people to come to your shop this month. Or 111 people a day. Is that realistic? You tell me. It might be. It might not be if nobody knows your shop, and you're in small town middle America.
The trick: identify your assumptions and test them. Try them out and change them when you have evidence that suggests you should. Experiment!
When looking at expenses, you can find some great rules of thumb online to help set realistic expectations. For example, the SBA recommends that you spend 7-8% of your revenue on marketing. This helps you budget your marketing spend. You can find additional info about other budget categories. Eventually we may roll-out an Example Budget that you can use to grab these percentages from. Interested in this? Drop us a note and tell us.
TLDR: Don't make these 4 mistakes with your startup
Not paying yourself a livable wage
Neglecting bookkeeping
DIYing everything
Unrealistic expectations for budget and growth
Too many small businesses fail, don't be one of them.
More soon,
Lane Hoffbeck
Consultant + Partner
P.S.
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