When we explored the costs of starting a business, we quickly realized that the financial realities of doing business don’t always match initial expectations. More specifically, small business owners reported spending more than twice as much in their first year than they had anticipated.
We needed to know: Where did their forecasts go wrong? Did they overspend or waste money in certain areas? And what could they have done to prevent this?
Turns out, there were some financial missteps almost all founders reported making in their first year.
To help you avoid these common pitfalls, we interviewed successful Shopify store owners to find out what they would’ve done differently in their first year and what financial advice they’d give new entrepreneurs. We also pooled the top resources from our blog so you can dive deeper into each topic. If you’re starting your own business, you’ll want to keep this list handy.
The first step to hitting your financial goals is writing them down. This might sound obvious, but many first-time entrepreneurs find writing a financial plan too overwhelming or unnecessary in the early days, so they skip it altogether. If you’re tempted to do the same, think again.
Creating a financial plan forces you to take inventory of where you are right now, where you want to be, and how you want to get there. It also helps you make better decisions in a pinch and forces you to remember the big picture when you’re feeling bogged down by the day-to-day of entrepreneurship.
“You have to figure out how much the company is going to need to survive for the first six months, the nitty gritty,” says Baxter Snider, Founder of Olives and Applesauce “What do you think your sales are going to be with that? What do you hope your sales are going to be? What’s going to happen if you don’t hit that? What happens if you go viral and you exceed that? You need a backup plan for both scenarios.”
What’s more, just the process of writing a financial plan can save you money.
Our research found that businesses who reported using financial plans and budget kept costs down and made more money in their first year.
Generally speaking, the bigger your professional network, the better. Every person you meet could be a potential advisor, customer, or partner. And in the early days, it can actually help you cut costs significantly by turning your time and skills into currency. For example, Baxter Snider traded one of her products, a baby carrier, in exchange for free product photography in the early days.
Not to mention, the easiest way to accurately forecast how much money you’ll need to invest in your business is to talk to people who have started similar businesses, or who advise those businesses.
Some tips for building relationships with like-minded entrepreneurs and small business advisors:
Every small business owner wishes they had more time and resources. But free goes pretty far these days. Don’t hire employees or buy pricey software until you’ve tried some tools and know exactly what you’re looking for. In the early days, focus on experimenting, seeing what works and what doesn’t, rinse, and repeat.
Some popular free tools and apps you want to check out:
LEARN MORE: If you’re just getting started, Shopify’s list of Free Business Tools includes everything from logo makers to purchase order templates. And if you’ve already decided to launch your store on Shopify, the Shopify App Store has thousands of free apps to help you grow your Shopify business.
With your product idea in mind, you may feel inclined to leapfrog ahead to production, but that can become a huge financial drain if you fail to do any product research or validate your idea first.
If you’re manufacturing your product, you should spend the better part of your first year investing in research and development. And once you have a prototype, you need to validate that other people will love it just as much as you do. Product validation ensures you’re creating a product people want and will pay for, so that you don’t waste time, money, and effort on an idea that won’t sell.
There are several ways you can validate your product ideas, including:
In the same Cost of Starting a Business study, we found that companies who didn’t spend enough time on product research and validation, and jumped ahead to branding and marketing their product, spent twice the amount of money when they had to revisit their product designs later inevitably.
“In hindsight, we should have taken a step back and figured out how to design our [swimsuits] the right way,” says Marcia Hacker, Founder of Sauipe Swim. “We rushed and I’ve had to spend a lot of years making up for it—and financially I’m still paying for a lot of those early mistakes. We were investing so much on packaging and product photography, without having the foundation there. We got distracted by the shiny stuff. So, number one lesson: don’t rush product research. Evaluate your market. Follow successful competitors for a few months and see how they do things. Then invest in the shiny things.”
“Number one lesson: don’t rush product research. Evaluate your market. Follow successful competitors for a few months and see how they do things. Then invest in the shiny things.”
Startup marketing is tricky, especially if resources and expertise are limited. And even if resources aren’t limited, pumping money into paid ads doesn’t guarantee you sales.
In our Cost of Starting a Business research, we found that businesses who spent more on marketing in their first year earned less revenue. As a rule of thumb, you’ll want to make sure you only spend between 5% and 8% of your total budget on marketing in your first year.
In our Cost of Starting a Business research, we found that businesses who spent more on marketing in their first year earned less revenue.
Make sure you’ve covered the following bases before running any sophisticated campaigns:
In the era of free shipping, smaller merchants are getting squeezed in their attempt to stay competitive with the likes of Amazon. Where big brands with high shipping volumes can negotiate lower rates with carriers, small businesses with lower shipping volumes have no bargaining power. Typically, that means they have to settle for high rates and absorb the shipping costs if they want to offer their customers affordable shipping.
So, before you do anything, ask yourself:
How you answer these questions impacts your overall costs, so understanding them early on will ensure you allocate enough money for shipping.
Normally, small business owners negotiate rates with each carrier individually. At Shopify, we recognize that shipping is an extremely challenging aspect of running a small ecommerce business, so we’ve given our customers a leg up with Shopify Shipping. Right now, Canadian merchants get negotiated rates with Canada Post, and US merchants get negotiated rates with DHL Express, UPS, and USPS.
Shipping at low volumes directly through FedEx or USPS was way more expensive than I expected. If I could do it again, I would go straight to Shopify. I would’ve saved a lot in shipping costs.
Save with Shopify Shipping
When you ship with Shopify Shipping, you get access to pre-negotiated rates with carriers in the US, Canada, and Australia and you can manage your entire shipping process in one place.
Tax laws and regulations are complex and can change often, so staying on top of your tax obligations is critical if you want to avoid penalties or hefty fines. More than that, understanding tax laws means you can take advantage of some real cost savings.
There are many ways for small businesses to legally reduce their taxes. Some tips to keep in mind in your first year:
Still, we strongly advise you to consult a tax professional to help you navigate tax laws and policies for your business. In fact, when interviewing business owners for our Cost of Starting a Business research, “hiring an accountant” came up repeatedly as advice to new entrepreneurs.
One business owner put it this way:
“I realized I had two options: I could keep doing my accounting and taxes myself to save money, which would cost me a few days of work, sleepless nights, and my kid’s soccer game. Or I could hire an accountant who can do it in 30 minutes and give me time back to focus on my business.”
Here’s a quick reminder why launching your business on Shopify is the right move. With Shopify you can:
