It is the new year, the season in which many start-ups are born, often influenced by the time and ‘out of the ordinary’ activities of the holiday season.

Before you jump in and mortgage the house for start-up cash, consider the following sins, all of which I have seen start-ups commit, which can lead down the gurgler on their own. The presence of several is almost always a predictor of disaster unless reversed very quickly.

I speak from hard-won and first-hand experience.

The strategies used to reverse them are many and varied, depending on the circumstances of the business. A tech start-up setting out to disrupt an existing market, or indeed create a new one, is entirely different to a start-up intending to steal market share from incumbents in a mature and stable industry.

Undercapitalisation

Insufficient working capital and absence of longer-term financial depth and resilience are equally deadly. Most start-ups I have seen drastically underestimate all the costs they will face. Failure to recognise all the costs and having the resources to address them leads to the undertaker.

Insufficient capital to make the required investments to create the product and operational infrastructure are equally dangerous. All the expenses must be paid as you find customers and service them.

The working capital requirement is (almost) always underestimated. Good budgeting and rolling performance measurement is essential, so you can anticipate the cash needed in the immediate future necessary to survive, or indeed, adjust expenditure to match the cash.

Not having enough money to get started ensures you will not get started. ‘Bootstrapping’ might be fashionable, lauded in the ‘start-up porn’ that infests the net, but is really challenging. However, it may be slow and tough, but it leaves you in control.

Poor cash management

Seasonality, and all sorts of things impact on the need for cash, and the timing of it coming in and going out.

People always underestimate the costs, and overestimate the cash inflow., and the timing of that cash.

13 week rolling cash flow forecasts are essential, they enable you to manage the peaks and troughs, and take advantage of the things that come up: to be opportunistic.

You must distinguish between fixed and variable costs. Identifying the drivers of costs makes the maths a bit more complex, but still essential. Identifying all the drivers is essential.

Variable costs are variable, but according to what??

Variable costs are driven by customers, as they drive the demand. Therefore, forecasting the flow of customers, and what they will buy is essential, i.e., a sales forecast. The more accurate your forecasts the better ability to manage variable costs and shape fixed costs will be.

Revenue generating activities.

Revenue generation is a mix of sales and marketing activity. Selling prices and customers are important, so do sensitivity analysis of price/customer traffic matrix.

As time moves on, sales forecasts should get better, so the productivity of your cash can be improved.

You must get the variables of sales forecasting as right as possible. Do rolling forecasts of sales

Understanding the dynamics of your break-even is important, it is probably the most underused metric in ‘start-up land’.

Poor record keeping and control

It is essential to make sure records are in order. Even for small businesses, it usually makes sense to contract a bookkeeper. While it is an expense, it frees up time, and more importantly, head space.

Keeping the books is a pain in the arse, but proper record keeping and internal controls are essential for managing operations, improvement, and regulatory governance, both public and private. If you must borrow money, sell the business, or raise equity capital, you will need good records.

Controls are the procedures that ensure that the records are accurate, timely, and available.

Documentation is essential: inventory, employees’ hours, sales, debtors, creditors, customer lists, price lists, and so on. You need systems to protect and manage the information.

Finally, safeguard your cash, control the receipt and payment of bills, you need to ensure there are controls in place to mitigate the potential of fraud, and to ensure assets and liabilities are handled properly.

This is the shit part of starting a business.

Records are a necessary evil. It will not guarantee you succeed, but failure to manage the information will ensure you fail.

Pricing is left to the last minute

Remember the old sales demand curve from economics 101. Too low, leave money on the table, too high. You miss out on sales.

Pricing is a complex process; it must play a key role in the strategic thinking of the business and must be done from the perspective of the customer. Too often I see businesses calculating their costs (usually wrongly) and just adding a margin, without any reference to the customer and volume matrix.

Not understanding their business model

This might seem a bit obscure, but I see constant mistakes made by SME’s because they do not understand the drivers of their business model. For example, the  Senate enquiry  into the Franchising industry that reported in mid-march 2025 slammed a number of the major franchise groups, especially the Retail Food Group, owners of Gloria jeans coffee, Crust Pizza, and a number of other franchise retailers. The report contains a number of emotional stories about the poor governance and management practises of franchisors, but when the emotion is removed, many of the failed individual businesses that signed up did not understand what they were signing up for. A franchisor makes their money selling franchises to franchisees, then clipping the ticket on all purchases and revenue, while charging for services such as accounting and advertising, on which they take a margin. Buying a franchise and not understanding the business model of the franchisor is just dumb.

Similarly, relying on supermarkets for your sales requires that you understand the way the supermarkets make their money, and the hidden and transaction costs involved in dealing with them.

Misdirected or lack of marketing.

Peter Drucker said the sole purpose of a business was to create a customer, and he was right. To create a customer, you need marketing, of some sort. It will rarely happen by osmosis.

You must know who your primary customer is, and how to reach them, engage them, sell to them, and have them coming back for more. Every interaction is an opportunity for a further one, building to a repeat customer who advocates for you, the very best form of marketing there is.

Unmanaged growth

You cannot outgrow your problems; you must fix them first. Cash flow and profitability problems are never solved by growth. Watching a business grow too fast is like watching a little kid trying to run, they trip over their feet. Their brain wants them to run, they know how to do it, but the foundations are not sufficiently in place to allow it to happen.

Processes need to be optimised, subjected to continuous improvement, documented so they can be scaled,

Everyone wants growth, but running out of cash is the cause of many successful businesses to fail. They fail being successful.

Growth is a huge consumer of cash, most often necessary before the results of the growth are reflected in the cash coming in. I have seen many seemingly successful businesses fail by trying to run before they walk reliably.

 

 

.