Many entrepreneurs are highly skilled in certain areas – be it cooking, engineering, management or networking – but have had no formal financial training. And when their business gets going, they’re forced to learn a whole lot very quickly, often simply to avoid disaster.
To help spare you these rude financial awakenings, here are seven tips for giving your business the strongest start possible. The best part? You can start today.
Start saving now
One of the best things you can do to prepare for life as an entrepreneur is to start an emergency fund – not for the business, but for you. Starting your own company is a risky move, and the last thing you want is to be worried about your own financial situation while your business struggles into life.
The rule of thumb is to have at least three months’ living expenses in the bank at all times – although some people aim for six or even nine months’. Having some extra cash stacked away in a savings account will not only buy you greater peace of mind, it can help you manage unplanned expenses and will be a lifesaver in the event you need to take time off work to focus on your business.
Watch your overheads
Fixed costs are a perennial problem for small businesses. The greater your overheads, the less flexibility in your budget, and the harder it is to navigate the financial ups and downs of entrepreneurship. If there’s any service you can feasibly go without, you should.
That said, be careful not to cut any essential corners – you may be able to go without, but that doesn’t mean your clients can. It’s important to find that balance between quality and efficiency.
One of the best things you can do to prepare for life as an entrepreneur is to start an emergency fund – not for the business, but for you.
Don’t put the chicken before the egg
It’s easy to get caught up in slick office space and the latest gadgetry, especially if you've just received a bunch of funding. But remember that a soft couch is no substitute for a healthy bottom line. Clients and investors will be impressed by the numbers, not the trimmings.
This applies to virtual spaces, too. As entrepreneur Don Milley told the New York Times, his social media company, iParent, went under after spending too much time and money on “bells and whistles.” Rather than focusing on the platform’s core offering – an online community for parents and their families – iParent’s resources were wasted on peripheral features like a fridge magnet store and text-alert service.
To avoid iParent’s fate, it’s important to keep your business as lean as possible. Only rent the space you need. Don’t upgrade your systems unless it’s absolutely necessary. Identify your core offering and put that before everything else.
Develop interest before committing
While starting your own company is always going to be a risk, having a client base before opening day can greatly improve your odds of success. I know it seems like common sense, but more than a few young companies have launched too early, poured money into futile advertising, and wound up having to close shop. Having someone to sell to right out of the gate can help manage cashflow, buying you time to grow.
While starting your own company is always going to be a risk, having a client base before opening day can greatly improve your odds of success.
Calculate your burn rate
Once you’ve started your business, you’re likely to have negative initial cashflow – you’ll be burning money. How much capital your business goes through in a single month is your burn rate. For example, if your business generates $2000 per month, but costs a total of $2500 per month, your burn rate is $500.
Measure your runway
This is your deadline for generating profit – it’s where you turn back if you’re not off the ground yet. The simplest way to measure your runway is to divide your capital by your burn rate. So, if you have a burn rate of $500 permonth, with capital of $3000, you have six months to get your business in the air, or call it quits.
Think about the future
Finance is one of the most highly transferable skills you can have – it’s the same in every industry. When starting your own business, learning how to push money around is one of the best investments you can make. Take advantage of the free and cheap resources available to give yourself an edge.
Joel Svensson is a Melbourne-based freelance writer specialising in politics and business.