3 Ways New Businesses Can Lose Money Before Earning a Dollar

For young startups, cash flow is everything. When you read about these new companies, it is often in the context of funding. Angel investors, venture capital firms, and startup accellerators make headlines, because they're so important for small businesses. Without them, most couldn't even get off the ground.

The lack of money in small businesses means a unique set of realities. Specifically, startups simply cannot afford to waste money. Yet almost all of them do. Even if a small business knows exactly where it needs to distribute its funds, it can misidentify individual opportunities. The cost of such mistakes can turn a promising company into another case in bankruptcy court. 

Before startups even get into the business of earning money, they can run into traps that suck the funds right out of their bank accounts. These pre-operations items are absolute necessities -- few if any startups can get away without them. Yet there is plenty of potential to spend far more than is necessary, and far more than is affordable to a business with limited means. Identifying these areas up front, and addressing them in a comprehensive manner, will provide a business with a better chance of succes.

Incorporation Fees

Yes, you have to pay to become a company. It sounds a bit unseemly, but it's the way incorporation works in America. While the process should be straight forward and easy, handled directly through government officials, it is, predictable, a convoluted process that almost always involves a third party. And wherever there is a third party involved, money changes hands. Find the wrong incorporation service, and you'll have essentially flushed money down the drain. Find a good one, though, and you can get away without giving away too much.

There are two keys to finding a quality incorporating body. The first, obviously, is cost. Some companies charge under $100, while others can charge in the thousands. That brings us to the second point, which is to closely examine the precise services these companies offer. Look for the differences between cheaper and more expensive companies, and see if their service offerings differ. If they do, conduct further research to determine the actual value of those additional services. 

A lot of work can go into this process, which should be as simple as filling out a few forms from the government. Yet it can save you untold money at a crucial stage of your business. Fail to research incorporation fees and services, and you potentially waste money before you've even made a dollar.

Hiring

The people you hire wil -- not can, but will -- make or break your company. It is nearly impossible to hire sub-par personnel and expect to succeed. That means two realities for startup owners:

1. A sizable chunk of the budget must go towards payroll. Every once in a while you might find a great candidate willing to work for meager pay with hopes of a future payoff, but that is a rare occurrence.
2. The hiring process must be a slow, discerning one. As the saying goes, hire slow, fire fast.

Even if you want to accellerate your business's timeline, hiring quickly should still not be an option. The quicker you are to hire, the greater the chance of a mistake. And hiring mistakes can be the costliest mistakes a business makes. While costs can be kept to a minimum in the search for qualified candidates, once hired the costs skyrocked. Trainining, benefits, and other costs hit immediately. Then there is salary, which begins accruing on Day 1. Imagine hiring someone and paying them a month's salary, but getting no tangible benefits from them. That's money flushed down the train.

The only way to avoid such crippling costs is to be slow and deliberate when choosing employees. You might pass over someone you think is pretty good, because pretty good simply isn't good enough. You need to not only hire motivated people, but people who fit with your own values. That's the only formula for a long-term, successful employee-employer relationship.

Office space

In the past, leasing office space fell under requirements for any business. As the internet has democratized business, that has become less of a necessity, yet many startups, particularly those in creative industries, still need a central meeting place. As you might imagine, renting office space is not cheap. Make a few miscalculations, and you'll spend far more than necessary. Just as bad, miscalculate the other way and you'll need to upgrade before your lease expires.

How does a startup founder know what size office she needs? This is where vision plays a huge role. Imagine both the best-case and worst-case scenarios. What kind of office would you need in each case? Keep these in mind when searching around. If you see the company growing quickly, or if you see an enormous risk, seek out a short-term lease, even if it costs a little more. If, on the other hand, you have a slow-but-steady business model, you can save a few dollars by going with a longer-term lease.

Another key to office space is location. It might cost more to rent in a centralized, popular area, but that can also mean happier employees. Employees with long commutes tend to be less happy than those who can get to the office in under 30 minutes. So consider your hiring area as well. The last thing you need is to hire a superstar employee who doesn't perform up to his potential, because he has to drive 60 minutes each way.