Young Upstarts

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Why Do Startups Often Not Make A Profit?

Most startups do not fail because they had a bad idea that could not find a market, but rather because the founders and startup teams got overwhelmed or were missing key ingredients to success.

Finances are a huge part of startup success or failure, but while a lack of funds is a significant problem, it’s usually not the biggest problem. Often, there’s a disconnect between the decision-makers and what might be thought of as the dry, boring realities of successful management.

Many founders or startup teams gravitate toward sales or design. They’re people who like to build things, or they’re people who like to connect with others, but they’re rarely people who like to fill in spreadsheets and review reports and come up with predictive data models that tell them how long they can keep operating on their current revenue.

Often, founders have an entrepreneurial mindset. They like starting things, trying new things, trial and error, and continuous change. However, running a successful company involves a lot of due diligence, some core leadership, management and even accounting knowledge, and the ability to delegate, entrust others with your weaknesses, and empower them to help you with critical elements such as tying decision-making to profitability, and not just gut reactions.

One of the reasons why startups often don’t make a profit is that the leadership is either unaware of their own strengths and weaknesses, or is unwilling to relinquish information or power to let others with necessary strengths come in and help in areas in which they are weak. This usually comes about when founders don’t work with qualified, experienced finance professionals and/or refuse to take a close look at finances, including progress to date and projections, on a regular enough basis.

There are a lot of costs associated with getting a new business up and running, and it’s to be expected that a new business might take some time to turn a profit, but it’s common for founders to progress with optimism and expect fortunes to turn without having a clear plan and timeline for exactly how and when they will be turning a profit. This can get them in trouble with their team, their creditors, their investors, and possibly even their customers if a sudden lack of finances starts impacting the ability to provide goods and services to the expected level of quality.

Sometimes, it’s the lack of a proper business plan that really hurts the startup. If the business was launched off of a vision, product idea or loose handshake agreements, but there was no due diligence in building a thorough business case, then the unknowns can sweep in and cripple forward momentum. If you’re launching a new venture, you need to investigate the market and understand both your customers and your competition. You need to work out your costs at an incredibly detailed level, with not only an expense line for every supply, overhead cost, employee hour and delivery expense, but also a contingency for if any of those items change. Detailed budgeting and risk management are not skills that most founders possess or even appreciate.

Guarding their own interests and being vigilant when it comes to finances is another area in which many startups stumble. There are more things to do in a day than there’s time for, and perpetually fewer staff than are needed, and things slip through the cracks. When founders find finances and detailed recordkeeping dreary, they can miss opportunities or have unpleasant surprises as a result of simply being distracted or not investigating potential areas of concern thoroughly enough. This can happen on every level from the miniscule to the massive, but it’s especially common when it comes to small, fine-print-type items. For instance, many companies were improperly charged PPI on their accounts and now have the opportunity to claim those charges back from the banks, but how many are aware of this saving? The Santander PPI claim alone affected numerous companies, and there is help available to reclaim these lost funds.

Of course, simply being under-resourced is another problem for many startups. This can happen because there’s not a skilled salesperson on the team, or because a startup is in a geographic location that has few local investors, or because the founder underestimated the funds needed and wasn’t tracking expenditures frequently enough or in enough detail.

Startups often don’t make a profit because of routine financial management. Strong product development skills and good relationship management are necessary, but if a startup has insufficient support from finance professionals, it is likely to miss out on opportunities, overspend, under-earn and ultimately fail no matter how great its idea or product was.

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Young Upstarts is a business and technology blog that champions new ideas, innovation and entrepreneurship. It focuses on highlighting young people and small businesses, celebrating their vision and role in changing the world with their ideas, products and services.

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