Let’s look at some of the common mistakes to avoid as a new entrepreneur or start-up – and what to do if you find yourself facing a cashflow shortfall despite your best efforts.
Mistake #1: Underestimating expenses
When you’re just starting out, it’s hard to build a realistic picture of expenses. That’s why many new businesses underestimate their outgoings. You might guestimate the cost of software licenses for example, or under account for the cost of stocking your shelves or buying the necessary tools and equipment. You could fail to factor in insurance costs or shipping expenses.
This is a more common scenario than you might think. According to research, 50% of new business owners underestimate their first year’s expenses. It’s an easy mistake to make but one that can put you on the back foot right away.
How to avoid it
Plenty of research is essential to avoid nasty surprises further down the line. Get accurate quotes from suppliers for any goods or materials you’ll buy. Research rent or lease costs using a platform such as Rightmove and check any applicable business rates. Get quotes for things like insurance and business broadband using online quote comparison tools.
If you plan to advertise, work out a realistic budget. If you want to advertise on Google, use its handy cost tool to work out your budget and expected ROI. The same goes for social channels like Facebook and Instagram.
Make a list of any software you’ll need and add those prices to your budget too.
You can find tools such as this startup costs calculator online to help you make sense of the numbers and bring your estimates together.
Mistake #2: Spending too much money on the wrong things
You’ll feel like you’re burning through a lot of money at the beginning of your business journey – and that’s OK, as long as you’re spending money on the right things. All too often, startups find themselves in difficulty because they’re spent too much on the wrong kind of things. That might look like hiring too many staff too soon or paying for a larger office than is needed in the early years.
How to avoid it
Work out a budget for your first year. Decide what your priorities are early on to avoid spending too much on things you don’t really need or can’t afford up front.
Mistake #3: Not allowing for tax and PAYE
When you’re an employee, things like tax, national insurance and pensions are taken care of. As a result, it’s easy to overlook the impact of those costs when you’re starting out yourself. This is especially true for things like corporation tax, which is payable nine months after your accounting period / financial year. It’s easy to forget about these annual taxes when you’re spending money through the year so you may get a nasty surprise and find there isn’t enough left to cover the bill.
How to avoid it
Although it’s easier said than done, you’ll need to be proactive about your tax planning. Work out exactly what your liabilities are, and set that money aside each week, month or quarter.
To be safe rather than sorry, it doesn’t hurt to divert a set amount of every payment you receive into a business savings account. That money should then be earmarked for taxes, national insurance and so on, so you always have enough in reserves.
Mistake #4: Getting your pricing structure wrong
Figuring out what you should charge for a new product or service is notoriously tricky. You can’t go on gut instinct alone. Arriving at the right figure actually takes a lot of number crunching and market research, and there’s an ever present danger of going too high or too low.
If you price too high, you might be pricing yourself out of the market before you’ve started. That will impact your sales figures and throw your budgets and projections into disarray. Price too low and you’re in danger of not making enough profit to survive.
How to avoid it
Finding your pricing sweet spot is a lot harder than it sounds. v by McKinsey suggests that around 80-90% of prices are set too low, as companies undervalue their offerings. It may actually be better to charge more initially its researchers say, because the price can then be lowered. On the flip side, researchers say that it’s much harder to increase a price after you launch into the marketplace.
To work out what you should charge, you’ll need to do the legwork. Competitor and consumer research are good places to start. You’ll need to know what competitors are charging so you understand what’s generally acceptable. And you’ll need to know what consumers are happy to pay so you can make a final decision.
Don’t fall into the trap of thinking that you should simply price a bit cheaper than your competitors. If your product or service is newer, more innovative and has more features, it could be seen to be more valuable. That cost-benefit analysis is an important part of your pricing matrix.
What if you still can’t get it right?
Sometimes, despite your best efforts, your cash may not be flowing in the right direction. That could be due to things outside of your control, such as a sudden change in market conditions, a landlord increasing your rent, customers not paying bills on time or a supplier changing their payment terms.
Whatever the reason, you’ll need to act. Plugging a cash flow gap can be stressful, especially if you’ve already maxed out your credit cards, overdrafts and been refused for a bank loan.
That’s where we come in.
We specialise in helping businesses smooth over their cash flow shortfalls with fast, uncomplicated business loans. We can have the funds to your bank in as little as five business days. We know that you may not have a great credit rating as a new business, and we won’t expect to see a 100-page award-winning business plan.
If you need help, we’re here. Just pick up the phone!
