The Entrepreneur Insider network is an online community where the most thoughtful and influential people in America’s startup scene contribute answers to timely questions about entrepreneurship and careers. Today’s answer to the question “What are some common mistakes young entrepreneurs make?” is written by William Vanderbloemen, founder and CEO of Vanderbloemen Search Group.
When I first started my company, I lost a lot of sleep over developing Internet domain names, second-guessing myself, crafting business models, second-guessing myself again, searching for talent, and second-guessing myself one more time.
Today, almost six years later, upon serving hundreds of churches, nonprofits, and business clients, I’m at a place with my company where my primary focus is fixing broken things and working on new things.
As a young entrepreneur, both in those early formative years up until now, there is one thing that still keeps me up at night: walking the tightrope of overspending versus investing in the business. It’s an uncomfortable and unrestrained struggle that will never go away throughout the lifespan of your business.
Watch out for these five mistakes young entrepreneurs often make so you can harnesses your intrinsically wired strengths and set up your business for future success:
Tendency to be religiously optimistic
Young entrepreneurs tend to be religiously optimistic, assuming they’ll always be great. This causes them to over-expand and overspend. Imagining results and funneling actual money into those ideas is a risky game that may or may not end up being a worthwhile investment. Before you commit or contribute to your imagination, make qualified assessments on potential outcomes. Question ‘what could possibly go wrong,’ rather than optimistically assume ‘what could go right.’
Fear of spending
Contrary to the point above, some entrepreneurs are terrified of a financial downturn and save too much, which can hold them back from scaling their business. For example, a couple of years ago, I learned that the overhead of retention programs — like gym memberships and contributing to employees’ HSA accounts — created an ROI for employee satisfaction, allowing us to keep high-capacity people around longer. We retained quality team members by investing in creating a culture where people loved coming to work. Similarly, if you do not invest enough, you will bottleneck key areas that require funding for growth.
Too much focus on the dream
This is an intangible investment. Young entrepreneurs are so good at selling their dreams, but they think people will stay only for the dream. When accumulating clients or hiring staff, keep in mind that they will come for the dream, but they won’t always stay if you fail to take care of them. Everyone is a sales person for his or her own values, and everyone has dreams of their own that match those values. When they assess their values against your dream, yours might simply apply to just one season in their lives. However, if you invest in your team while casting your dream’s vision, your team has a higher likelihood of long-term buy in.
True entrepreneurs are able to bend reality to their will. However, there are market realities that they cannot change. They must differentiate between the two and learn to budget and plan accordingly. For instance, make intentional investment predictions to build cushions for downturns so that you have the cash flow to be agile when the economy changes. Recognize the probable outcomes for each component in your business and plan for their worst-case scenarios.
Every industry is different, but for the most part, I tell young entrepreneurs to only spend what they have. Do not borrow money thinking that hope is reality. My company operates on a cash basis, and it has helped tremendously in helping us sustain growth as opposed to exponential growth, which is not scalable.
However, you have to invest to expand. It’s a balance, and a hard one at that. The question is, “Do we spend to expand or save so we don’t go in the red?” If your trajectory is not properly assessed, you’ll be frustrated with the outcome.
As a young entrepreneur learning to navigate through overspending and investing in business, you will need to work both harder and smarter in order to achieve the best fiscal outcomes.
William Vanderbloemen is the founder and CEO of Vanderbloemen Search Group, a boutique executive search firm that helps churches and ministries find their key staff. He is also the author of Next: Pastoral Succession That Works. Connect with William on twitter @wvanderbloemen.
Read all responses to the Entrepreneur Insider question: What are some common mistakes young entrepreneurs make?
Yes, it’s Okay to Ask for Help When Starting a Business by Suneera Madhani, founder and CEO of Fattmerchant.
Why the startup world is nothing like Shark Tank by Joy Randels, CEO of New Market Partners.
How slow decision-making can ruin your business by Karl Martin, founder and CTO of Nymi.
This is why so many startups end up in financial trouble by David Smith, founder of Vexti.
This is where most startups go wrong by Stephen Lake, CEO of Thalmic Labs.
Doing these 3 things will destroy your startup by Michael Gasiorek, editor-in-chief of Startup Grind.
The avoidable mistake every entrepreneur makes by Andrew Filev, founder and CEO of Wrike.