There was a recent article in Young Entrepreneur about “cash strapped start-ups” that discussed the financial pitfalls of starting a business, and how to avoid or minimize the negative outcomes. As a person who operates very conservatively when it comes to finances, I favor any plan that includes the least amount of debt. Sometimes, however, it pays to take that gamble if you believe in your business, in your idea and in your ability to make that dream a concrete (and lucrative) reality.
The ideas presented in the article were pretty commonplace, but they are so incredibly important to entrepreneurs. The start-up process is laced with challenges, and it is imperative that these financial basics remain front of mind when it comes to funding your dream.
A good number of start-ups get their funding from friends and family, instead of banks. This makes perfect sense- if done carefully and correctly. Be sure to understand fully and completely what your friends and family want to get out of their investment- Is it a donation? Do they expect to be paid back in full with interest, and when do they expect this to happen? Do they think that they will reap financial benefits from your future success? Be sure to have an open discuss so that all parties know the terms of the deal, and it wouldn’t hurt to get everything in writing. The document doesn’t need to be 72 pages long and written in sophisticated legalese. Having concrete evidence of the deal will not only help to avoid miscommunication between friends and family, but it will also help future formal investors to feel more comfortable investing in your company because your finances are clean and well documented.
Finally, an entrepreneur must be clear on two things- how much cash they have on hand to spend on business expenses when they begin, and the sacrifices they are willing to make to continue to fund their business if they experience difficult financial times. Especially when there is a family involved, both spouses must agree on what they are willing to sacrifice so that the business can succeed. Are vacations going to be replaced with stay-cations? Will eating out and other entertainment expenses be replaced by family board game night and ramen? Are you willing to relocate to a smaller house in a neighborhood with lower taxes, if necessary? Knowing exactly what you are willing to give up so you can pursue your dreams will not only help keep family relationships intact, but it will also give you a more accurate analysis of your business’ financial situation.
Knowing what you’re working with and what you’re willing to give up will help make the start-up process easier. In that difficult start-up time that comes after expenses are increasing but before the revenue starts pouring in, remember to be creative. Store owners have rented out space to other vendors to generate cash flows, and sometimes molding your business model to better fit your target market is in order. Just remember that being stagnant in a constantly changing world will only lead to failure.
“I was set free because my greatest fear was realized. Rock bottom became the solid foundation on which I rebuilt my life. It is impossible to live without failing at something, unless you live so cautiously that you might as well have not lived at all, in which case you fail by default.” -J.K. Rowling