It’s no surprise that startups are stressful. The whole basis of starting a business is taking risks, which doesn’t leave much room for comfort. The stress that an entrepreneur feels can be beneficial to getting a venture off the ground, but some entrepreneurial stress can be prevented.
Cash flow is the top stressor that entrepreneurs have when starting a business, and is the biggest factor in canning an idea. Most startups turn to seed or angel funding when cash gets low, but risk and low valuation can keep businesses from getting the capital they need to feel comfortable financially. A founder’s lack of income can impact their ability to keep the entire company afloat, and a lack of payroll expenses can keep employees from coming or staying on board during the early stages of a business.
While a start-up can’t guarantee a certain amount of sales or cash flow, there is something that a founder can do to maintain their finance-related sanity for the first year.
First, build up a cash reserve. Second, make sure you don’t invest in areas of your business that are unnecessary. Third, bootstrap as much as you can. And fourth, pay yourself first. These four tips will at the very least keep you afloat, and at the most allow you to build your company without breaking the bank.
A cash reserve sounds like an easy thing to prepare prior to starting a new business, but many entrepreneurs poorly plan or mismanage their cash reserve. Many business owners plan for the best case scenario instead of the worst, which leaves them scrambling if things go wrong. Your working capital needs should include six months of income, plus save 5–10% of all revenue earned. This can be adjusted for different business needs, and as the business grows, a different cash reserve percentage or total may be necessary. If you need to keep inventory, have more legal costs due to trademarks or patents, or have to rent a commissary or manufacturing space, you will need to prepare for higher upfront costs and include them in your budget.
It’s ideal to imagine your startup working out of a huge office, with staff collaborating in a free-flowing workspace, however, businesses need to not invest in areas that aren’t necessary. Office space, for the most part, is an expense that most businesses don’t need, especially in the first year. Instead, your home office or kitchen table are the most cost-effective workspaces. If you need a place for collaboration, a coworking office or local cafe would be the next least expensive options. As far as staffing needs go, many of them are also unnecessary for a startup. Instead of dishing out an annual salary and benefits for a full time assistant, employ a virtual assistant. Contracting work out when your cash flow is low makes sense — you only pay for the projects and hours you need work done. You work with qualified, capable people who can finish your projects for much less than a full-time team can. Saving money by not paying out huge rental and salary fees is a great way to keep dollars flowing where that are beneficial.
Bootstrapping is almost a competition among some entrepreneurs, but all should employ a reasonable level of it in their business ventures. Cutting down expenses to the bare minimum will help that cash reserve hold out in case things go south, or production takes longer than planned, or an unexpected cost pops up. In the event that you face a large, unplanned expense, the best action is to pay for it yourself. If that’s not realistic in your business, then next best step is to ask family and friends to invest in you and your business. If this also doesn’t garner enough, before you turn to the bank, turn to your network. Crowdsourcing is a popular way to gain funds necessary to take your business to the next level, and build a customer base. Investors and banks will have additional costs associated with their services, so bootstrap whenever you can to cut those costs.
Founders who start a business often cut back on everything, work ridiculous amounts of hours, and refuse to cut into a businesses profits by not paying themselves. This is contradictory to what should happen: founders should always pay themselves first. There is a lot of time, effort, and brain-power associated with starting a business. Startups cannot exist without these founders, so it only makes sense that they are paid for their efforts. Startup owers shouldn’t be raking in the dough to the detriment of the company, but they should be setting aside a liveable wage for those first few years. A good industry standard is no more than $75,000 per year for at least the first year, despite profits. Those who don’t pay themselves end up broke, burnt out, and with nothing to show for their efforts.
Financial issues can stop any business in their tracks, but with a little planning, saving, cutting, buckling down, and knowing where to put your money, a startup can succeed and founders can build their dream company. Staving off financial stress can help you put your focus where it is needed, on product or service development, customer relationship building, and exposure opportunities, instead of wondering where your next dollar is coming from.