Taking a leap of faith and starting your own business venture is a dream come true for many. However, this requires utmost dedication and strategic planning on the business owner’s behalf. First-time entrepreneurs invest time and energy in the building and acquiring new clientele and often neglect its financial planning.
Here are the five most common money mistakes that first-time entrepreneurs make:
1. Not Planning Miscellaneous Expenditure
First-time entrepreneurs often do not take miscellaneous expenses into account while planning a budget for their venture and therefore end up bearing the consequences by losing out on hard earned profit. It is crucial for new business persons to budget miscellaneous costs in their business plan from the very beginning as it helps to create a buffer in the overall financial plan. Allocating a certain amount for miscellaneous expenses comes in handy in challenging times and assists in keeping the business afloat during such adverse times.
2. Creating a Skewed Capital Structure
It is critical for new ventures to ensure equilibrium between debt and equity for a smooth functioning of the business. However, many a time new entrepreneurs fail to maintain this balance which leads to either too much equity and too little debt thereby experiencing over dilution of funds; or too much debt and not enough equity thus creating an interest servicing capability crisis.
3. Chasing The Wrong Metric
It is often noticed that business owners focus their attention on chasing a higher gross merchandise value or traffic directed towards their portal instead of taking more accurate measures towards revenue generation, net profits & generating free cash flow. It is important for entrepreneurs to acknowledge the fact that metrics such as Gross Merchandise Value are only one of the elements of the business's performance and not the whole picture. Shifting their concentration towards more crucial aspects and pushing for growth in terms of increasing revenue & net profits as well as generating cash and keeping inventory low and supply chain efficiency are other areas to keep a sharp eye on as these will positively impact the ventures financial stability and ensure growth.
4. Not Having The Right Fund Raising Strategy
More often than not, first-time entrepreneurs do not possess in-depth knowledge about the processes involved in raising capital for their business. Therefore, they move between series A, B, C and D funding in a rush, losing a pie of their business each time and over-diluting to angel investors and venture capitalists. To avoid this, they must understand the main difference between these rounds, the maturity level of their business and the reason for raising this capital. A post analysing these key factors they should devise a strategy that enables them to measure risks accurately and then indulge in relevant fundraising processes looking at not just venture capital equity but also venture debt to have a balanced capital structure thereby avoiding over dilution.
5. Not Focusing On The Business Aspect Of Their Plans
Entrepreneurs frequently overlook the financial and accounting aspect of their business and instead entirely focus on passion, practice and proficiency in executing the vision & mission of the business plan. A lack of attentiveness towards the financial facets can lead to losses and instability of the venture. Therefore, one must maintain a balance between accounting and passion in order to run a successful business.
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This article originally appeared on Entrepreneur.com. Minor edits have been done by the Entrepreneur.com.ph editors.