Putting up a new business can be so demanding and stressful that even rational people can sometimes fall into the overspending trap.
[related|post]In your enthusiasm to make your business succeed, you yourself may fall into this trap and face the following undesirable situations:
- High rental cost. By getting office space that’s much too big for your startup business, you can get strapped for cash due to your high rental cost. This mistake would be all the more painful if your business doesn’t pick up soon enough contrary to your expectations.
- High depreciation cost. It’s not advisable to buy top-of-the-line office equipment and furniture when they are not essential to the success of your business. They not only will be a big drain to your initial capital investment but also result in high depreciation expense.
- Too many employees. In your desire to make everything in your business move smoothly, you may end up hiring more employees than you really need. To avoid bloating your payroll, see first if you or your manager could handle the functions of the positions you want to create.
- Overstocking of inventory. Because you want to take advantage of a supplier’s volume discount, you might order initial inventory that’s way above your normal operating requirements. This can prove to be a bad deal when the cost to maintain the excess inventory proves to be higher than the supplier’s volume discount.
- Credit line abuse. You can end up acquiring unnecessary debt when you take on your bank’s offer of a very high credit line. You can then be tempted to treat your credit line as capital infusion, enticing you to go on an expansion binge that invests heavily on capital expenditures. Because you used short-term financing for the long-term investment, however, you soon begin experiencing cash flow problems and abnormally high interest costs.