Are You Financially Prepared For Your New Business?
Every new idea in business has to bore through a ton of skepticism. The entrepreneurs who started Xerox, Polaroid, Reader’s Digest, Ford Motor Company, and the other legendary successes were people with almost superhuman persistence. They spent years coaxing prospective backers into putting up enough money to get their venture started.
Some business can be launched on just a dribble of dollars – that is, enough assured income to keep you solvent until your business can support you. These are usually service businesses: typing, dressmaking, an art service or ad agency, an online store, or almost anything that one or two people can run from a small office or even a room at home. Mail-order businesses are often started with as little as $400 to $1,000. Other types of small business need only a thousand or two to get off the ground. Even a manufacturing business can be started with $600 if it’s in a basement and if it needs only hand tools or one machine. A little retail store can open its doors for not much more than the cost of its inventory and lease, plus utility deposits and the like.
As you figure your start-up costs, they may look small. But don’t underestimate other needs. Ongoing costs like overhead, insurance, maybe a reserve to carry customers’ charge accounts, and other expenses can grow burdensome. Many businesses go broke simply through under-capitalization.
Before you leave a full-time job and start your own business you should have enough capital or know where you can get it in order to cover your family and business expenses for at least six months and preferably a year. If you have to dip into the cash register for groceries, you’re flirting with bankruptcy. Go over your bills or check stubs for the past couple of years. Add a cushion for unexpected medical expenses and car repairs. Increase the total by the anticipated inflation rate. If your existing resources equal this amount, and you know you needn’t touch those resources for your business, then your family should be safe.
Long before you open the doors, your regular expenses will start. Even after opening, you’re likely to run in the red for months. So don’t count on taking home several hundred dollars a week while you’re getting under way.
Almost any new enterprise needs to plow back profits (if any) during its early months. This is true even if the business booms – because a boom means you must expand or die. (If customers don’t get good service, they don’t come back.) As you expand you’ll need more merchandise, more supplies, more equipment – maybe a bigger place of business, bigger payroll. Meanwhile you’ll have less credit than later on, so your expansion may have to be financed mostly from your reserves. Are you ready for this?