(This is number 2 on my list of the top 10 startup mistakes)
It happens way too often: Startups that might have made it go under because they run out of cash. Sometimes that means they didn’t calculate how much they needed to cover those early months when revenue was less than spending. That’s a common problem. Sometimes they underestimated one-time startup costs. Sometimes they didn’t allow for those lags that happen in business-to-business sales, the two or three months that go by between delivering the invoice and getting paid. All of these, and a lot of other things, boil down to just not having enough cash.
Unfortunately, we think in terms of profits, but we spend money, not profits. Profits are an accounting concept, a benchmark used for decisions and taxes. Profits are based on the assumption that the sale, the spending of cost of sales, the paying of related bills and getting paid for the sale all happen in the same months. That might be true for some very simple businesses, like maybe the handicraft maker who sells for cash at the Saturday market; but it’s not true for most businesses. Instead, we have to manage cash flow, which is related to profits on the long term, but just isn’t the same thing.
You can never accurately forecast the future, but you can do some decent educated guessing. Start with a good guess on how much you’re going to have to spend as expenses, and assets you need before you start. Then do a reasonable projection of sales, costs of sales and running expenses, so you can estimate how long it takes–and how much money.
So to start up right with a new business, understand how much you need; and if you can’t raise enough, then revise your plan, focus better, and make the money match the plan.