Are you making costly mistakes as an entrepreneur? How can you avoid financial pitfalls that lead to business failure?
Starting a business is challenging, especially when it comes to managing money. In How to Get Rich, Felix Dennis writes that many new entrepreneurs stumble when handling startup capital and cash flow. These missteps can quickly sink a promising venture.
Read on to learn about common mistakes entrepreneurs make and to get Dennis’s expert advice for staying afloat.
Common Mistakes Entrepreneurs Make
Dennis observes that inexperienced entrepreneurs often handle startup capital poorly. He addresses four common mistakes entrepreneurs make that often lead to financial losses and failed companies.
Mistake #1: Failing to Ask for Capital
Dennis acknowledges that seeking capital is often the most unpleasant part of starting a business. Asking others for loans or donations can feel uncomfortably like begging. Too often, entrepreneurs make the mistake of letting fear or embarrassment get in the way of securing needed funds. The willingness to go through these difficult feelings separates serious entrepreneurs from people who merely dream of success.
Mistake #2: Getting Capital From the Wrong Sources
Dennis says it’s important, though, to go to the right sources for startup capital. He cautions against relying on credit cards with high interest rates or resorting to predatory lenders. Seeking funding from venture capitalists is similarly perilous: While they’re often enthusiastic about investing in startups, they typically demand substantial ownership stakes and swift returns on their investments.
Instead, Dennis recommends tapping into personal networks and seeking small favors from friends, family members, and acquaintances. He prefers this strategy because it enables entrepreneurs to maintain complete ownership of their companies. Moreover, people within your personal circle are generally more patient regarding investment returns compared to banks or venture capitalists.
Mistake #3: Mismanaging Cash Flow
Another often-fatal mistake by entrepreneurs that Dennis discusses is being overoptimistic about your business’s cash flow. He stresses the critical importance of earning profits right from the start. Don’t operate at a loss and assume that you’ll be able to make up for the expenses later.
Dennis explains that poor cash flow management can cause you to lose your company. This is because you’ll have to borrow more and more money to stay afloat. Then, if you’re not able to pay off those debts, your lenders could seize control of your business. That exact process has relegated countless founders to minority investors or salaried employees of the companies they started.
Mistake #4: Spending Money Unwisely
Another common mistake entrepreneurs make is also related to money: unwise spending. Dennis writes that entrepreneurs—particularly inexperienced ones—are often tempted to keep pouring resources into a failed project, thinking that they can still rescue it and turn a profit. However, any money you spend on an endeavor that’s already doomed could be used more productively elsewhere.
| Tip: Keep Your Options Open Dennis urges entrepreneurs to spend wisely and to accept when they’ve made a bad investment rather than trying to recoup their losses with further investments. However, it can be hard to know which investments will be profitable and which will be wasteful. Therefore, instead of trying to predict whether a particular investment will be worth it, it can be more effective to rely on flexibility. In Antifragile, risk analyst Nassim Nicholas Taleb advocates keeping as many options as possible open for as long as possible. This strategy is rooted in the idea that maintaining flexibility maximizes potential gains while minimizing losses. By having multiple options available, you can choose the most beneficial path and avoid costly mistakes. This approach allows you to adapt in the face of uncertainty and changing circumstances. In the business world, Taleb’s principle often translates to conserving capital until absolutely necessary. By holding onto resources, you can maintain the flexibility to respond to new opportunities or unforeseen challenges. However, once you invest money in a specific project, you close off other potential avenues for that money. Therefore, before devoting more money or other resources to a project, ask yourself two questions to determine if it’s the best use of your resources: 1. Do I really need to invest these resources right now? 2. What other options would I be rejecting by making this investment? |
