5 Cash Flow Mistakes All Tech Startups Tend To Make
Year after year, investment in U.S. tech startups continues to pour in. One look at Bloomberg’s startup barometer shows the ludicrous growth over the last decade or so. It’s tough to say whether there’s been a better time to establish a tech company (it’s pretty competitive at this point), but it’s hard to argue that there’s been a more convenient time.
With the tech industry going from strength to strength (finding its way into more elements of our lives), internet infrastructure getting better, hardware getting cheaper, and cloud services expanding at a rapid rate, ambitious tech entrepreneurs are perfectly positioned to thrive.
Of course, success is far from guaranteed, especially when the beneficial environment can grant a dangerous sense of confidence — and one area in which major mistakes tend to manifest is cash flow management (if you’re not familiar, Wave has a solid guide to cash flow for small businesses, so check it out).
Damaging your cash flow can be enough to completely sink your business, no matter the scope of your idea or the quality of your work, so you can’t afford to risk it. To help you avoid them, let’s run through five cash flow mistakes that often crop up for tech startups.
Investing Money They Can’t Afford To Lose
The founders of tech startups are often driven by concepts: they’re problem-solvers, digging deep into the issues that interest them and envisioning a future in which they can comprehensively resolve them. This kind of forward-thinking approach is great for showing passion and inspiring the people around you, but it’s not so great for cash flow.
Why? Because when someone is fixated on the theory of what they’re trying to achieve, they can become obsessed with making it a reality through whatever means are available to them — regardless of whether they can afford those means (totally forgetting the golden rule of investing). It’s particularly dangerous for someone who never learned the perils of using credit cards, because they can imagine that it’s fine to accrue debt (after all, when the goal is reached, money will presumably be no issue).
Expecting A Sudden Rise To Success
The tech world is littered with examples of companies that went from unknown quantities to hot commodities extremely quickly. That’s just how investment can work in such a speculative industry: knowing that the next trillion-dollar idea (along the lines of Snapchat or Uber) could be just around the corner makes investors willing to take some significant risks in backing new contenders. The problem with this is that tech startups often expect to follow in the footsteps of those overnight sensations, instead of dreaming big while prioritizing everyday performance.
You don’t start a company if you don’t believe in the idea, so that belief (and some confidence) can lead you to think that your success is inevitable, and sure to arrive soon. Sadly, that simply isn’t the case. Plenty of tech startups with great ideas and a lot of potential flame out due to mismanagement or even bad timing — they spend wildly, expecting to hit it big within months, then run aground because they never anticipated needing a multi-year growth plan. (CB Insights has a huge range of startup post-mortems that I strongly suggest browsing.)
Allowing Clients To Keep Delaying Payments
Silicon Valley holds a lot of responsibility for shaping what became known as startup culture — something that’s often mocked for its creative indulgences. For instance, you may be familiar with the stereotype of the startup with a postmodern approach to company structure and working life, with employees sleeping on the floor or riding Segway’s around the office. And while this stereotype isn’t accurate, it’s certainly true that tech startups can be lax about procedure.
Unfortunately, some business matters demand a strict approach — and one of them is bringing in client payments. It’s important to maintain a good relationship with clients, particularly in the startup phase when one loyal client can make a huge difference, but you can’t allow clients to fail to meet their financial obligations. You have to chase them as needed. If you let people get away with paying late, then your cash flow will be under constant threat — at any time, a bad combination of late payments could lead your company to grind to a halt.
Being Sloppy With Recruitment
The tech world is all about talent — far more than infrastructure, at least. When you’re going to be largely powered by people working in isolation on laptops, it shouldn’t matter so much how good they are at networking or how personable they seem to be. It does matter, though, because tech startup founders make the classic mistake of hiring people they like.
Sometimes this is fine, because a founder might draw from a talent pool they were part of: for instance, their old college, or their previous workplace. In such cases, they’re bringing in people with skills they can vouch for. But they can just as often hire friends, and friends of friends, figuring that they want to be surrounded by people who like them and share their vision. Given how much money goes toward payroll, new hires must be selected very carefully for their skills and potential — they’re the future of the company, after all.
Forgetting About The Need To Make Money
Mixed up in all of the mistakes we’ve looked at so far is perhaps the fundamental mistake that destroys businesses on a daily basis: forgetting that a business needs to make money. It isn’t the only goal of a business, that’s true, and the time frame will vary (some companies need to be profitable every month, while others can go without profit for a long time but keep growing due to rising revenue and consistent reinvestment), but it’s a mission-critical component.
Very simply, if you don’t make money (here are some reasons why this can happen), you’ll run out of it, and that’ll be the end of your business. You can only run to investors for so long before they stop believing that the slot machine of your operation is going to pay out. It’s great to have starry-eyed long-term goals, but you’re never going to reach them if you don’t forge your business into a functional revenue-driving operation first — only once you’ve reached sustainability will you be able to start working toward them.
About The Author
A writer and small business owner, Kayleigh Alexandra is an expert in all things content, freelance, marketing, and commercial strategy.
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