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8 Expenses That Cause Most Startups to Lose Their Money

6 Mins read

Managing and scaling a startup is not a cakewalk. A startup owner has to wear multiple hats, one of which is being the money manager. A new business has to pay for premises, equipment, business expansions to new locations, and wages/ commissions to the staff and suppliers. Thus, a startup owner needs to play the role of a banker who constantly manages revenue, investments, and expenses and weighs competing resources. 

If you launched a startup, it most likely was because you wanted to launch your idea and watch it grow and make a difference in people’s lives. Surely you didn’t introduce a startup to manage expenses and spreadsheets. 

Yet, the bitter reality is that under every milestone, startup owners have to make cost-effective decisions. For instance, they need to think about whether to go for a coworking space or traditional office, the team size, which marketing campaigns to invest in, whether to use a paid or free website builder, should it be paid ads or earned media, and so on.

Failing to manage your expenses can lead to a high cash burn rate, thereby draining your capital for performing day-to-day operations. 

So, whether you like it or not, managing company expenses is a huge part of being a successful startup owner. In this post, we will share the top startup expenses you should be extra cautious of when scaling your venture.

Which Expenses Are Causing Your Startup to Lose Money?

Though most startup owners are careful about their expenses, one of the biggest reasons their venture fails is that they run out of cash. Data shared by CB Insights revealed that it is the top reason startups fail within the first few months of launch. 

Let’s look at top business expenses that could cause your startup to lose money.

Going for an Expensive Premise

Working without an office space is unthinkable for businesses of any size. But whether you rent or buy them, office spaces are quite expensive and make up a sizeable portion of the fixed costs. 

Thus, most startups end up spending a fortune renting or buying an office space, when there are so many cost-effective options available. Today, most startups are moving from traditional employment to virtual working or coworking spaces. 

Virtual working not only saves startups the cost of managing an expensive office space but also offers employees flexibility. Besides, it boosts productivity, reduces other operating costs, and improves employee engagement. 

Coworking spaces also prove to be cost-effective when compared to maintaining physical offices that are bought or rented. They offer customized office spaces with minimal operational headaches like technical infrastructure, housekeeping, broadband connectivity, and others. 

Thus, virtual working and coworking spaces are great options for startups looking to cut their expenses and boost the bottom line. 

Opting for Cut-Rate Short-Term Solutions

Startups that thrive on a shoestring budget often harbor the mindset of investing in the cheapest solutions. Though this mindset can help them cut down their expenses, it should be applied to all aspects of a business. 

For instance, most software startups may think of building cheaper versions of popular software. However, what they don’t realize is that they may have to completely rebuild the product from scratch as their venture grows. This will cost them more than what it cost them initially. 

Similarly, if a startup needs to move goods from a warehouse to customers, picking the cheapest shipping provider could cause them to lose sales. Chances are that the cheapest shipping company is notorious for late deliveries. This will increase customer complaints and churn. Further, they’ll have to spend more on customer acquisition. 

Most founders are cash-starved; hence, they are constantly looking for ways to save more money. Yet, it is important to prioritize quality over cost-saving. Don’t let your short-term decisions ruin long-term growth. 

Investing in Expensive Tools

Technological expenses like the cost of building a website, information systems, software, and others account for a huge chunk of average startup expenses. More often than not, startups end up investing in tools and equipment that aren’t needed or are bloated with features they don’t use. 

Most of the tools available in the market today are built for enterprises. So, investing in them can be overkill for startups. 

Instead, startups should look for tools better suited to their needs and business size. This will not only save them money but also enable them to put the tools to best use. 

Poor Accounting

Most startup owners fail to hire the right people to manage their expenses. In fact, in most cases, their finance team comprises the founder. 

Though it’s not a bad idea to keep track of your business expenses, it’s better to hire someone who’s an expert at it. Failing to do so, can lead to poor cash flow management, especially as your business scales. 

Even if your startup is at an early stage, it’s advisable to set up a dedicated finance and accounting team to stay on top of your business expenses. Hire a skilled accountant or CFO to ensure that you are running a sustainable business. 

If your budget doesn’t allow you to hire an accounts team, count on technology. Use accounting software to track your receivables and payables and manage your inventory. Tools like Sage Accounting, FreshBooks, Gusto, and Expensify among others can help you improve your financial management processes while minimizing the chances of errors that can cost you a lot of money. 

You can also invest in financial forecasting and business planning tools to build accurate financial reports and manage your business in a better way. 

Premature Scaling

All startups have to scale after a certain amount of time. However, when the scaling happens faster than you or your product are ready for, it is referred to as premature scaling. 

Early marketing expansion, too much early funding, and overhiring (we will talk about it in detail later) are popular examples of premature scaling. 

Premature scaling is by far the most common reason for startups to lose money and fail. For instance, if you have too much access to funds early, you may start burning cash for initiatives that may not help you achieve your goals or offer you adequate returns. 

Similarly, investing a huge sum for customer acquisition before assessing whether or not your product is a great fit for your customers. 

To avoid premature scaling, it’s important to scale in response to the product demand. In the initial months, invest your resources in understanding if your product is apt for the market. This will help you scale efficiently and make optimum use of your funds. 

Overhiring

All startup owners aspire to reach a stage of early business expansion. To prepare for this, they often tend to overhire, causing them to fail prematurely. 

Building a strong team is important but overhiring in the initial stages of your startup launch can drain your funds, leaving you little to invest in critical business initiatives. 

It is better to err on the side of being understaffed than to spend a huge amount of money on a staff you could do without. Make sure you hire the right number of people for the job. 

Keep a watchful eye on your team for signs of burnout. If your team could use some help, it’s wise to work with freelancers and part-time employees until your startup is ready to scale. 

Failing to Monitor Your Marketing Campaigns

Lead generation and customer acquisition are top priorities for startups, especially when they have just launched their venture. However, generating leads and getting customers on board is challenging in the competitive landscape that prevails. 

Most startups invest huge amounts of money to bring in sales without measuring the impact. In fact, in the early stages, it’s easy for startups to spend and exhaust their funds. 

Hence, it is important to measure your marketing efforts. Each dollar spent should be tracked to assess whether or not it’s producing the ROI that’s expected. Monitoring marketing campaigns will help you understand what worked and what didn’t, thus allowing you to optimize your resources. 

Make sure you monitor key marketing metrics like customer acquisition cost (CAC), retention rate, customer lifetime value, gross profit margin, return on advertising, and monthly churn rate, among others. 

Hiring Ineffective Consultants

Startup consultants are indispensable to startups because they offer an array of services that can support startups as they grow. They can help startups enhance their business plan, build a marketing strategy, find the best candidates for the team, and even source funding.

However, when hiring a consultant it’s important to research their background, expertise, and experience. Choosing the wrong person for the job can cause your startup to go downhill. A few consultants ask for a lumpsum amount and offer little value in return. 

Avoid hiring consultants who offer little proof of their achievements. Consultants who are good at their job will always set realistic goals and expectations of what your startup can achieve. Further, they will share their track record of the businesses they have worked with and made a visible contribution. 

Summing Up

All startups have to spend money to make money. However, when you have just launched your venture, it can be tough to decide the right things you need to spend on. That’s where most startups lose their money. 

The expenses we have shared in this post will encourage you to fund your startup wisely. Be mindful of these expenses and follow the tips shared to take your startup on the right path to success. 

Aanya Rachel is the Content Manager at The Address, a coworking space in Ahmedabad, Gujarat. She writes on various subjects related to coworking, remote work, employee productivity software, and tech startups.

Expenses stock image by dpVUE .images/Shutterstock

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