The Top 8 Most Common (and Costly) Financial Mistakes Startups Make

Before getting into business, entrepreneurs should make themselves aware of the top financial risks to startups.

According to the US Bureau of Labor Statistics, about 20% of early startups failed in 2022. 44% of those failures resulted from running out of cash, and 47% from a lack of available financing. 

Why will some startups fail in 2023? 

Recession fears have led many angel investors and venture capitalist groups to behave much more conservatively, leading to a smaller available pool of funds relative to the number of startups seeking investment. 

Poor financial management will also be to blame. 

Underpreparedness is a fatal flaw in many of these cases—hubris as well. Familiarize yourself with the top startup financial risks to protect yourself for the unpredictable year ahead. 

How to identify the top risks facing your startup 

Most businesses face the same risks that lead to failure. It would help if you also considered the specific vulnerabilities within your business model, industry, and category. 

Run through some “worst-case scenario” thinking. Then, ask yourself the critical questions to prepare yourself with contingency plans:

• What would happen if we don’t hit our sales goal in the next 3 months? 6 months? A year?
• Does our company budget leave room for potential revenue shortfalls? 
• Which standard operating procedures are in place to protect our budgets? 
• What would we do if we needed to seek a new financing solution? Who would we turn to?

Your startup’s top risks can be addressed with proactive actions. In the meantime, use this guide as a reference point to begin protecting yourself and your business from the most common errors made by founders.   

These 8 risks can easily lead to your startup running out of cash. Consider these actions within the context of your current operation. Are you on track to avoiding these typical mistakes, or do you need to implement course corrections to support the long-term health of your startup? 

Risk #1: Not diversifying your funding sources

There are a number of funding sources available to startups. Have you considered all of them? 

If you’re bootstrapping the business, there will likely come a time when you need to invite seed funding to the table. Low-cost small business loans—such as those offered by the Small Business Administration—may also be an attractive option.

It depends on whether you’re willing to trade off ownership shares or cash paid into interest. No money is free, so weigh your options and diversify your sources, so you always have somewhere to turn when you need to increase your cash position.

Risk #2: Letting accounts receivable fall behind

Ensuring your startup can stay on top of your accounts receivable balance will directly translate to your liquidity and strength as a business. 

Startups need to show revenue coming in early and often. Your sales figures may indicate income growth, but you’re headed for trouble if you’re not collecting payments on time from your customer contracts. 

The benefits of credit card payments include more predictable revenue—but they come at the expense of processing fees. On the flip side, your customers’ accounts payable departments may be slow—at best—when settling invoices. 

There are risks associated with both payment strategies—but either way you choose, stay on top of collections. 

Risk #3: Burn rate spells trouble

Increasing your burn rate after receiving a new cash infusion is not inherently a bad choice. What concerns investors is if your new burn rate could lead to the startup running out of cash within 12 months or sooner. 

In some cases, spending what you need to grow—while balancing income shortfall risks—can be a delicate balance. On the one hand, your growing startup will require increased advertising spend and internal staffing capacity to increase recurring revenues. But—what if you fail to hit those initial revenue goals, and your expenses are tied down in contracts and salaries? 

There is no formula for this problem—but these decisions will separate the winners from the losers.

Risk #4: Relying on expensive debt funding

In a pinch, debt funding may be available to you—but at what cost? 

Consider the potential impact of high-interest-rate loans with large monthly payments on your cash flow. If you don’t have the cash to sustain it, this could lead to floating expenses on credit cards with even higher interest rates. 

Expensive debt funding can run your business ragged—and impact your ability to secure more favorable financing from future lenders. 

Risk #5: Hiring without a plan 

Startups must make every hire count in more ways than one, especially at the beginning. 

Unstrategic hires will cost more than they can bring in. Candidates ought to have diverse, comprehensive skill sets—plus be willing to pitch in for expansive needs that sometimes go beyond their job descriptions. You can reward their efforts via larger equity shares, raises, and promotions.

On the other hand, hiring too many strategic positions early on will cost more than you may be able to sustain.

Developing a hiring plan will help you identify priorities—and remain in balance with financial realities.

Risk #6: Ignoring legal advice

One consumer or employee lawsuit could sink your entire business. 

Get the advice you need from a legal team to protect yourself from risks. Their input ought to cover:

• Privacy policies and data protection 
• Employment and labor laws
• Tax laws 
• Patents and copyrights

Risk #7: Spending too much on overhead 

Stay lean with overhead costs for as long as you can. Don’t burn investor money on excessively expensive recurring costs, such as pricey office rental space, and assets that will depreciate, such as furniture and technology. 

Consider the benefits of a remote workforce—businesses can save up to $11,000 per employee by forgoing office space in favor of working from home. 

Risk #8: Poor awareness of current financial status 

Failing to keep your financial reports up to date can lead to making uninformed decisions about your business. Many founders inadvertently neglect this aspect of financial management as it quickly becomes tedious and highly involved. 

Check out our article on hiring your first financial controller—and why bringing one on board sooner rather than later is important. 

Tips to overcome common startup risks

Here are a few additional tips to help you take proactive steps toward overcoming common financial risks to startups. 

• Create a staffing plan, and stick to it. Review your growth plan, understand what hiring needs come along with it, and prioritize your budget accordingly. 
• Stay on top of your financial reports and regularly review them. Creating a standard procedure for reporting will help hold you accountable and create a pathway to scalable processes that generate financial insights amid rapid growth and hiring cycles. Hire key financial advisors and staff to oversee these tasks as early as you can afford to do so. 
• Retain a legal firm. Embed their advice into your startup policies and operations.  
• Invest in systems that will help you stay on top of accounts receivable. Set objectives and deadlines for collecting payments, and offer various payment methods where possible to drive toward positive cash flow. Leveraging automated accounting systems will support your goals. 
• Stay lean for as long as you can. Consider operating remotely, spending conservatively on overhead costs, and hiring the best and brightest wherever possible.