Dear Entrepreneur, Plan to Spend More Than You Think
Ninety percent of startups fail. It’s a fact. And the cold, hard truth is that they all usually fail because of the very same reason: lack of capital. When you are starting a business, it's crucial to overestimate expenses. You need to have enough cash to open your doors, find customers, and then give them time to tell their friends how much they love you or your product. If you don’t have enough money to do that, then you aren’t ready to open your doors.
Cash is king.
The amount of capital that it takes to launch a successful business varies based on the type of business. Opening a retail store is different than opening a restaurant, and opening a restaurant is different than becoming an event planner. Regardless of your chosen industry, remember… cash is king. Without enough of it, you’ll never be able to get your business off the ground.
I came across an article recently in Inc.com that said, "Profit is a theory. Cash is a fact." Those are wise words. While you should expect that your expenses will be much more than your highest estimates, you should also accept the fact that your income will probably be much less. Unfortunately, reality isn't quite like A Field of Dreams. Opening your doors does not guarantee that customers will automatically show up.
Where should the money go?
Even if you pride yourself on being the best bargain hunter in the world, do all of your shopping on Black Friday, and have a coupon for literally everything, you have to break out your wallet for certain elements that will be essential to your business’ success. If you can’t afford to spend money on these items, your business will suffer – and you might become just another statistic.
Money needs to be invested in:
- A business plan – If you are patient enough to do this yourself, this is potentially one area where you can save a tiny bit of money. It requires a pretty significant time investment; hiring an outside party to complete a business plan for you may be well worth it. Your plan will delve into the specifics of your idea, identify your market, uncover hurdles, and help you create a roadmap for success.
- Your employees – Your team is going to be the face of your business – and your reputation – so pay for people that are going to represent you well. Most experts agree that a few high-quality employees that are paid well do more work than a handful of lower-paid employees.
- Marketing – If you need customers, then you need to market yourself. Everything from your website to your business card needs to promote an image of your company that says you are trustworthy and professional. A skilled marketing company will help you get to know your customers, support your branding efforts, perform market research, and assist you in developing trackable campaigns – so you will know what works, and what doesn’t.
- Technology – The one thing you will realize when you become an entrepreneur is that your time is valuable. Technology can save you time, so invest in what will make you and your business more efficient and productive.
- Accountants – If you don’t have a CFO, you should outsource this role. If you don’t feel like your company is large enough, then make sure you hire a competent accountant to handle your books. You need an expert to interpret numbers and even help you to identify pricing issues. When tax time rolls around, make sure you have an experienced tax professional file your taxes. They will know what deductions are right for your business, and they will also help you to avoid costly penalties.
- Lawyers – You may want to skimp here and go with some online service to file your LLC or generate a contract, but you’ll probably regret it. Find a local lawyer with knowledge of the legal system in your state. You want someone who has a lot of experience in contracts and common business disputes, and who will be on your side to protect you and your unique business offerings. A few extra dollars now can save you thousands down the road.
- Insurance – Insurance is often an afterthought for startups. They run to the closest insurance agent only when their landlord requests a copy of their policy. Insurance is critical and should be one of your first major expenses. It protects you and your business from theft, natural disasters, and even equipment shut-downs (depending on the policy). Identify an agent that specializes in commercial insurance, and then ask lots of questions. Insurance is another case where a few extra dollars a month can protect you from the unknown.
If you are planning on starting a business, keep in mind that it’s going to cost more than you think - and that’s fine. But, be prepared to spend money on things that will give you a solid base to grow upon. You shouldn’t pinch pennies when it comes to things like marketing or lawyers. Start with enough capital to do it the right way, and you won’t become part of that ninety percent.
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