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What's the Hardest Question to Honestly Answer When You're Planning on Starting A New Business?

Loud music came spilling into the street as curious onlookers lined up outside. “GRAND OPENING” was spelled out in giant glittering letters on the huge banner above the sidewalk.

We have everything for our launch party!” the new owner exclaimed as he guided me through his new shop.

Free snacks, free beer, even a killer DJ we flew in from New York!”

Wow this must have cost you a fortune! How does throwing a party like this affect your Cash Flow?”

Cash what?” came the puzzled reply. “I just put this on my credit card!”

Businesses fail for lots of reasons. Maybe there was no market for your product. Maybe the location was wrong. Maybe your advertising wasn’t working. But analysis by experts in the industry reveal one key reason that stands tall above everything else:

Running out of money.

Serial entrepreneur and Forbes contributor Eric T. Wagner writes that “the primary reason businesses fail is they simply run out of cash." http://www.forbes.com/sites/ericwagner/2013/09/12/five–reasons-8-out–of-10-businesses–fail/

In fact research shows that 80% of failed businesses died simply because they didn’t have a good grasp of the financial demands of starting a business.

So you need to honestly ask yourself:

“How can I afford to start a business?”

Starting a business is like running an (expensive) experiment  When you first start a business you need to string together suppliers, products and customers in a way that leaves you with enough money at the end of the day to payyour overhead and hopefully yourself.

But in the first few years you will likely change suppliers, adjust your products and get smarter about finding the right customers.  “Although the process of experimentation seems straightforward, it is surprisingly hard” Stefan Tomke writes in the Harvard Business Review when discussing the challenges of Business Experimentation. Click here.

It is especially hard because every time you make a change in your business, it costs you money without the certainty of earning a return.  Those first few critical years will come with critical lessons that you could only learn by actually doing what you dream. But you need to make sure you have the resources to keep on learning until you finally get the formula right.

Financing your business experiments:

Before you start up your dream business, you need a good grasp of your finances. This includes projecting what it will cost to launch your business, what it will take to operate your business and a healthy reserve to allow you to make changes for the unexpected.

Creating a good financial plan also means have a secure source of funding that you can return to if you need it. Options for financing abound,

  • Personal Savings (which is easiest for startups if you have the funds)
  • Borrowing from a friend or family member (often called Angel Investors or Seed Capital)
  • Securing a Bank Loan (which can be very difficult for newly established businesses)
  • Obtaining small business Specialty Financing (which can be found online through companies like Lendified.com)

Whatever options you choose, you’ll need to make sure you have enough money to fund all your startup and operating needs, from securing real estate to buying inventory, paying for the cost of marketing and advertising, paying employees, buying necessary equipment and making changes in your business as you go.

Bottom Line: 4 out of 5 businesses that fail will die because they simply run out of money. Ensure you have a Financial Plan that includes reserves to allow you to experiment and make changes as you go and Financing Source that you can return to if you need it.

Originally posted on SmallBusinessTalk.ca.

About the Author: Michelle Pinchev