“About 30% of Startups are Closed Because of Financial Mistakes”: Aviram Arviv on 4 Financial Mistakes that Startups Make

“About 30% of Startups are Closed Because of Financial Mistakes”: Aviram Arviv on 4 Financial Mistakes that Startups Make

It’s not a secret that almost 90% of startups that are established will close at a relatively early stage. But what many entrepreneurs don’t understand is that in 30% of cases, it’s due to financial mistakes that lead to closure 0— not necessarily a low-quality product, lack of competition, or marketing efforts, but errors in financial management and handling of money. What are these mistakes?

In the following lines, I will present to you four common financial mistakes that have already led to the closure of hundreds of ventures, in the hope that you will identify the points of failure in your organization and find a timely solution.

Financial Mistake 1: Confusing Income and Investment with Profits

This is a mistake that seems so elementary, yet it’s surprising how common it is. To thrive, not just survive, a business needs profits. It’s crucial to emphasize the distinction: investment is not profit. The purpose of an investment is to fund the development of a product or service, which, in turn, will lead to income. But income is not profit. From income, you deduct salaries, rent, equipment cost, taxes, and more. Profit is the amount that remains after all deductions from income.

Solution: Close monitoring of income versus expenses. Many entrepreneurs roughly know “approximately” what comes in and what goes out. That’s not enough. Data should be documented continuously in a way that allows for informed business decisions.

Financial Mistake 2: Incorrect calculation of Burn Rate

I talk extensively about this topic because it’s another critical mistake that has led to the closure of many excellent ventures. Burn Rate is the financial term that refers to the rate at which investments and budgets are being utilized. Many startups worldwide, including in Israel work without taking notice to funds, until one day they discover that they are out of money. Why? Because they did not plan and track the money that went out.

A competent CFO knows that this is one of the first things to do when an investment comes in: calculate how much the organization’s operation should cost over time and provide recommendations to the CEO accordingly. This calculation must include everything — salaries, rent, equipment costs, licenses, even kitchen supplies. Only after this calculation long-term growth be can planned. This leads us to the next common mistake…

Financial Mistake 3: Treating Financial Management as an Additional Task

Over the years, I have seen many startups where financial management was handled by the CEO, VP of Marketing, or Business Development Manager, or even the office manager. They are all  intelligent individuals. However, assigning financial management as a secondary task to someone who isn’t a financial expert is a serious mistake. Proper financial management requires knowledge and experience.  Delegating one of the most critical areas in the organization to someone who is not a professional is an opening to mistakes that may lead to the closure of the venture.

In this case, the solution is simple: hire a CFO, or at least a financial advisor who can help manage finances and cash flow.

Financial Mistake 4: Not Preparing a Plan for Tough times

Even if the business is flourishing, generating profits, investors are satisfied, and the venture is growing — there will come a day when a slowdown or even losses occur. Because a business is part of life, where there are always ups and downs. In fact, very few companies enjoy consistent growth over the years. Almost always, there are ups and downs.

The secret to success in this case is to acknowledge that challenging days may come in the future and prepare for it in advance. Prepare a plan that will help you navigate through difficult times: which expenses can be cut quickly, which departments can be downsized. If possible, create an emergency fund that you contribute to each month, so you have a financial cushion. If done properly, the tough period will pass quickly, leaving no irreversible damage and possibly even strengthening your venture.


Aviram Arviv is a financial expert and CEO of Danoy: Financial Solutions for Businesses.

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