In a blog post I made here a few weeks ago, I outlined the five developmental stages of a small business. The first two stages deal with transforming the business from an idea into a living, breathing business and then ensuring it's survival. The number one cause of business failure, and thus the biggest threat to the survival of your small business is running out of cash. As long as you have money in the bank, you are still in the game. As soon as it's gone, your business is gone with it.
That means that in order for your small business to survive, you need to be relentlessly focused on achieving a sustained, high volume of sales that drive consistent profits. This takes care of the cash coming in. A second related focus needs to be to spend as little money as possible. This minimises cash going out. Small business survival is very simply a matter of ensuring that you have more cash coming in then going out. Simple? The theory couldn't be simpler. Then why do so many small businesses run out of money?
I've been involved in numerous small business start ups of my own and have assisted friends and clients with many more and so I feel that I'm fairly well qualified to say the following: spending too much or spending money on the wrong things during this survival stage of the business kills more otherwise viable businesses than does a lack of sales. I've made many of these mistakes myself so it is from somewhat bitter experience that I am sharing the following ways to waste your precious money in the start up and survival stages of a small business.
Before I do that, though, I want to make a fundamental distinction. Your business has a 'front end', which incorporates everything that is visible to the customer and that is involved in achieving sales. It also has a 'back end', which is pretty much everything that is invisible to the customer. Until your business is well into the success and take off stages of it's development, do not spend any money on the 'back end' of the business. All this will be important in later stages as a lack of investment will significantly impact the customer experience, but for now they are an unnecessary drain on your limited resources. Every successful small business I have seen has put the full weight of whatever resources it has behind the 'front end' of the business until it is properly established.
So, without further ado, here are four ways to burn through your start up budget and destine your business to the rubbish heap of history. Please, please avoid these costly mistakes, especially if you are playing with your own money.
All expenditure needs to reflect where the business is at today, not at some imagined point in the future. IT systems sales teams will tell you that you want a scalable, futureproof system that can comfortably service 10,000 clients. That's despite the fact you are a new start business with half a dozen paying clients. Do not believe them. It sounds convincing that you should build invest once in your business systems. However, with the rate of obsolescence being what it is, by the time you reach 10,000 clients (if you ever achieve that lofty goal) the system will be completely out of date. Keep your money in your pocket now. This is the stage when you'll need it. If it proves slightly more costly to replace your initial systems than to start as you would like to go on, then deal with it. That said, it's highly unlikely that given the fact that your start up money will almost certainly be interest bearing, it probably won't be. Even if it is, though, when you have 10,000 clients you won't even feel the extra expense. During the survival stage it could make or break your small business. If it can be done with a spreadsheet, do it that way until it starts to affect the customer. At that point and at that point only, carefully weigh up the cost against the benefits of any investment.
So much of your ego is invested in your small business that sometimes you feel that you have to have the best of everything in order for it not to reflect poorly upon you. My advice is to get over yourself. If the customer doesn't care, it doesn't matter. Don't let team members 'empire build' either. Challenge every proposal for expenditure on the 'back end'. If any expenditure does not provide a clear benefit to the customer, it should be vetoed. Even if it does provide a clear benefit, if it is money spent on the 'back end' of the business then you need to ask if the same benefit could be provided more cheaply (through outsourcing for example) or whether it can be delayed. Spending money in the early days of your business is like giving blood: a little to the right people is a good thing but too much to the wrong people will kill you.
Just because a rival business has something doesn't mean that you need it too. I've seen small business owners lose all sense of reason in an attempt to keep up with the competition without really thinking if this investment is delivering value to the customer. Instead, it can deteriorate into an arms race that end uo weakening everyone involved, sometimes fatally. If you can't afford it, don't buy it. Even if you can, do your customers (not you) really need it? If so, do they need it right now? Resist the urge to keep up with the Joneses at all costs. The winner in business is the man with the most satisfied customers, not the most whistles and bells.
Failing to maintain enough flexibility in your cost base during the early stages will be fatal. That means do not enter into lengthy contracts if that can be avoided, including the lease for your business premises. This might prove to be more expensive in the short term but it will provide you with the flexibility you need to grow the business. The time to get tied into longer contracts is the success and taking off stages of the business. There should be a constant strain upon the 'back end' of the business. If your 'back end' is not struggling to keep up, you are not growing sales quickly enough.
These four mistakes will burn up your budget and can potentially sink your business. Please avoid them. They can be seriously harmful to your wealth. If you feel you need help and support whilst navigating the survival stage for your business, please call on Continuous Business Planning today.