Even though the past few years seemed ideal for startup businesses, the fact is that nine out of ten startups fail before even reaching the profit-making point. One of the main causes is that business owners enter this highly competitive field without having a reasonable financial plan set up. And since most businesses require regular and large investments in order to become profitable, it too often turns out that their financial projections were unrealistic, which can further lead to bankruptcy. We'll go through some of the common financial mistakes so that you hopefully avoid the downfall of your startup. 

Bad Pricing

What most businesses struggle with in the beginning is setting up the prices of your products so that they turn out to be profitable. You should always include the costs like insurance, commissions, administration, and rent in the price of your final product if you want to start making a profit. And if you're thinking that you'll have lower sales with higher prices, you might be surprised when you hear that higher prices can actually improve your sales. But if the product seems too expensive when you factor in all the costs, then you need to cut the costs elsewhere. Just remember, it's better to start with higher prices than to raise them immediately after launch. 

Lack of Capital

The first years of a business are always the toughest ones, and that's exactly the period where you'll need sufficient capital to survive and eventually break through. Most entrepreneurs will want to secure the working capital for 6 months of expenses, but you should probably aim for double the amount. It's important that you plan your expenses realistically and that you get some investors on board. The first investor is known as the angel investor, the person who'll invest in your startup and usually ask for the company's share in return. A good angel investor can go a long way in securing your survival through this period, and that's why you need to know how to attract them.   

Bad Debt 

Bad debtors can sink a startup like little else can, simply because it's extremely difficult to recognize them. During the first year, business owners are usually very eager to strike overly ambitious deals, with a lot of money being owed to them through credits. It's always best to try and prevent bad debts, by asking for money in advance. However, if that fails, many accountants recommend to always have a backup plan for debt collection. Early detection of bad debtors is just as good as prevention, so keep your eyes open and immediately stop delivering your products to such parties. 

Cost Management Struggles

Debt can be preventable with a smart cost-saving strategy in place. Some of the tactics which proved to yield the best results include:

• Work-from-home - If the nature of your work allows you to collaborate with your colleagues remotely, having everybody work from home can reflect positively on your budget. Without a physical office space, you save on rent, utilities and equipment. But be sure to invest in practical software that will aid you in communicating and managing your team, tracking their work and productivity to ensure everyone’s pulling their weight.
• Outsourcing - Delegating some of your business processes to a remote location is a cost-saving method startups have been relying on for about a decade now. In addition to it being a smart financial decision, outsourcing will also allow you to tap into new markets, find talented specialists, and even connect with a wider client base.
• Smart office space design - For team members who are in-house, make sure that space is adequately organized.  
• Service usage review - Are you really using all the services you are subscribed to? From time to time, conduct a detailed review of all your accounts - while some software may have been practical at some point, they might not be of much use right now and are only draining your already humble budget.
• Cloud computing - Although some of the cloud services may seem costly, a transfer to the cloud keeps all your important files safe from cyber attacks and in one place so that all the employees can access them.

Raising Too Much Money

There's no such thing like excess money, right? Wrong. The more money you take out of your investors, the faster the clock will tick on your business. Not to mention that you're now welcoming onboard more people and it becomes increasingly harder to steer the ship, which is something you definitely don't want as a startup. Changing directions can be a lifesaver, and you won't always count on it in the beginning, but it's important that you're able to do it if you hit a wall. The last thing you want is to be talking to investors all day long, instead of running your startup and trying to make profits. 

Bad data investments

Given that we live in the digital age and most companies, under those circumstances, hold their customers’ data in a digital form somewhere in the cloud, data loss is certainly something to be wary of. Besides the cloud, sensitive business information can also be stored on local nodes, this type of data storage is likewise not immune to failure and it is usually recommended to have one or more backups.

In case of major data loss these days, a company that failed to realize the importance of a proper backup is likely to be hit with big financial troubles and many fail to recover. Also, if customers’ data is leaked online by hackers, there is a danger of being sued by those individuals whose data has been released, which can also lead to bankruptcy. The bottom line is that you need to invest in IT.

Conclusion

Nobody wants to enter a business thinking about the very worst that can happen to it, but it's important that you're aware of all the obstacles and be prepared for them. As a business owner, you should have a backup plan and an exit strategy before even starting a business, because these can help you save at least something if things start going awry. If you went through our list of financial troubles, you should now be keeping your eyes wide open for the early signs of trouble.