When it comes to startups, there are quite a few opinions and perspectives on spending money to make money. Some founders argue to be frugal while others push to spend and grow as they hope to get even more investor cash. Regardless of what you believe, the second most common reason startups fail is because they run out of cash. Cash is the lifeblood of the small business or startup. While every situation is unique, you should initially adopt a perspective of spending your cash like you don’t have any. Why? There are no many unknowns when starting a company and the list of what could go wrong might be endless.
So, you need to walk a fine line of preserving cash and being as creative as possible to move the startup forward. Here are four insights on how you can preserve and maximize the cash needed to get a startup or small business off the ground.
Buying things you don’t need. Remember when you had no money, either early in your life, in college or that first job? You got by with exactly what you needed. When you start a new business, it’s understandable to want all new laptops, a cool website, trendy office location, best-in-class software, and a highly talented staff to help grow the company. However, if you’re itching to make major purchases (even if they feel like investments) near the beginning of your business, think these decisions over very carefully. Some expenses like building a website or attending an industry trade show will be mandatory depending upon the type of business you’re starting, but you need always to ask yourself if the expense in question is going to help you generate more revenue in the short-term. Other expenses such as work parties, team-building trips, and frivolous electronics that aren’t essential to the growth of your company offer very little value to your bottom line. Grow your business first and accumulate a higher level of disposable cash before spending on the “nice-to-haves.”
Taking on personal debt. Even if you’ve separated your personal and business accounts, scenarios often emerge that force you to dip into your personal funds to finance a business need, such as an expansion into a new niche category or a marketing campaign that promises to deliver a high return for the company.During the first year of your business, there are a lot of unknown variables and unexpected learning opportunities that’ll come your way. The reality is that you’re going to hit roadblocks. You’re going to have failures and some of these may come with a big price tag on them.If you’ve rushed out and purchased a car, home or another large personal expense and your business has something unexpected come up that means you won’t be able to pay yourself next month; you can’t be strapped down with an exorbitant amount of personal expenses. Be as lean as possible in both your business and personal life while growing your new company.
Keeping your powder dry—money in reserve. From Benjamin Franklin to today’s best finance experts, there’s no shortage of people telling you to keep an ample stash of savings at hand for unexpected expenses.Call it saving for a rainy day as there will be times when something unforeseen happens and covering the cost using your credit card is a shortsighted solution that only tends to create more problems down the line. Most financial planners advise entrepreneurs to keep at least three months’ worth of expenses in an emergency or contingency fund for both their business and their personal expenses. Investors have a term they use when funding a startup, your runway. That is, how much operating cash do you have to extend your company “runway” for as long as possible or until you are profitable. The further out in time, the better.
Understand Your Taxes and Their Impact. Don’t make the same mistakes that many entrepreneurs have made regarding the location, incorporation or structure of their company as it relates to taxes. Different types of businesses have different federal and state tax obligations, which allow governments to finance infrastructure and programs that benefit citizens. However, back when you were a full-time employee before you started your own business, your employer would give you an easy-to-decipher W2 form every year when it came time to file your income taxes. Now that you’re self-employed, you’re responsible for taking the initiative and paying your full tax obligations on your own throughout the year. As a self-employed individual or corporation, you must make estimated quarterly payments to the IRS so that you’re not stuck with a massive tax bill come April each year, and accurately calculating these requires some time and effort. Plan accordingly as this is now just a part of being in business for yourself. For the first time in your life, a tax advisor could be your best friend.
This article was written by Bernhard Schroeder and originally posted in Forbes.