You will not have a business if these 3 things are not in your startup budget.
Quote of the Week:
“The three most dreaded words in the English language are negative cash flow.” -David Tang
In your small business, do you have a budget? If you do not budget for these you will not be a business owner for long.
1. Have you budgeted for yourself to get paid?
It is a rare instance where you do not take a salary. That may apply to the college kid who can sleep at his parents’ house, eat ramen noodles, and has no children or spouse. This is a very small part of the community of entrepreneurs.
Risk craves reward. There has to be a period in which you start getting paid. Your business will only last for so long if none of the owners are getting paid. The excitement will drain quickly and there are only so many sacrifices that can be made. People will start abandoning ship or the raw energy of doing the business will disappear. In your startup, there has to be a timeframe where everyone is making some type of money. If you don’t budget for that or you don’t have time to review that and one year in no one is making money, that is a tough situation to be in.
The problem that we hear about and we don’t analyze are these venture startups. They pay people because someone went out and gave them a million dollars or there was a crowdfunding effort. However, this does not apply to over ninety percent of businesses. I have never gone more than ninety days without getting paid.
2. You need to budget for reserve money.
This is huge. I can’t tell you how many businesses I have asked what they put in reserves and they told me a line of credit. This may shock some people but I don’t have a positive attitude towards lines of credit in startup businesses. What ends up happening is that they create bad habits. I have gone to advise countless start-up businesses where the line of credit was exhausted within the first six months. Then the line of credit becomes a liability. It is a bill they have every month.
A line of credit should not be more than five to ten thousand in a typical small business. It should be enough to have overdraft or absorb one or two weeks of payroll but it is a bad habit to be touching lines of credit in the first year. The business has to be able to breathe and walk by itself. Exhausting lines of credit from the very beginning is one of the worst habits that I have ever seen in small businesses. I have looked over the bills of small businesses and seen this one-hundred and fifty-thousand or three-hundred thousand line of credit. It has become a five thousand dollar a month bill. It helped their business through a very short period but then it became an expense. Lines of credit are for short-term emergencies and they get paid back immediately.
If you are not putting money in reserves the very first rainstorm or problem will cripple your business. You will end up bringing on a partner or an investor that you don’t want in order to get through this period and then you will have a business that you don’t own 100% of anymore. You have to put money away systematically from every dollar of income towards reserves. I never enjoyed running my businesses until I started this practice because in the back of my mind I knew what it would take to knock us off the fence. You worry that someone will sue you or that you will get a tax or insurance audit.
Systematically put money into a separate reserve account and do not touch it. You treat it the same way that you would a tax liability. It is untouchable.
3. You must put money aside to market and advertise in order to acquire new customers at all times.
Small business owners have told me that that they love their repeat and word of mouth customers. All business owners love them, but it is very hard to build a business off of just those two types of customers. You need to constantly have a marketing plan in place in order to gather new customers at all times. I don’t know how you can start a second location if you don’t know how to advertise or market a message that goes with the company. You have to budget for this because at the end of every year there are going to be clients that you want to get rid of. If you don’t have the budget to bring on new customers you can’t fire aggravating ones.