Let's talk about shoe-string businesses; brick and mortar businesses started with almost no capital. The type of businesses that I really love working with. On-line businesses are a lot easier to start with less capital but not so with businesses with a physical location. I once knew a hobbyist photographer that made almost $50,000 in extra income a year working from his basement and on location at schools and sporting events. He wanted to quit his job and open a full fledged photography studio. I advised him that if he wasn't properly capitalized he would have to have a good plan, and if he could not see how to increase his photography income to well over $100,000 a year by opening his doors, then he should just keep it a hobby. The rent alone would sap his profits. He quit his job and opened the studio but closed his doors in his second year. He went from a healthy extra income to not being able to cover all his obligations.
If you're foolish enough to try and start a business that's under capitalized, let me share some of the insights that I've garnished through the years. Most of these businesses are usually started by technicians such as a chef who opens a restaurant or an accountant that opens an accounting firm - people who are experts at a craft that they have been using for other owners and now want to work for themselves.
My top five killers of small under capitalized businesses are; 1) Taxes 2) Not knowing how to run a business 3) Personal expenditures 4) Lack of a plan, and 5) Personal habits.
Let's take the "killers" one at a time.
Taxes are always surprising to a new business owner and tricky for someone under capitalized. Taxes can be accumulated daily but are paid monthly or yearly. It's the handling of the money between owing it and paying it that usually gets the owner in trouble, and often the interest and penalties are enough to tilt a new business into disaster. It's tempting to use monies collected for the State or Federal to pay a bill due now and try to earn enough to pay the Sate and Federal taxes later - never a good idea.
The best advise for a new business concerning taxes is hire an accountant. However, most small businesses can't afford one right away. If that's the case you should seek advice and do as much research as possible on the taxes that pertain to your business. There are resources out there and it's literally your job to locate and utilize them. Most of all, use extreme discipline when handling money owed to taxes. Always remember that those monies owed to taxes do not belong to you. Mistakes are costly and the only eraser is capital. If you are under capitalized, make sure you make no errors with your taxes.
2) Not knowing how to run a business.
This is an area that most people get upset with: when they're told that they don't know enough about their business. Technicians are experts at creating their products but running a business is a separate skill set from creating a product. Interestingly enough, a study was done on small business owners with new start ups. They found that women owned businesses survived better then the men. Further broken down, they found that when confronted with a tough decision, the women owners sought advice from experts more often while most of the men considered themselves experts and sought only their own council.
A great way to deal with this knowledge gap is to set up a Board of Directors for your business. You'll be surprised by how many really successful people are willing to help a small business. Try not to waste their time or obligate them too much. An agreement that they would take your call or answer your e-mail when you have a tough decision to make is plenty, and then try and buy them lunch periodically one at a time to glean knowledge and update them with brief e-mails. The things you don't know will cost you the most. If you don't have the capital, you have to find a way to make better decisions. Other than your Board, you should try and make friends with other business owners and even competitors not in your immediate market. I found that having fellow business owners as friends was very valuable. Always keep your support system and family informed on what you're doing as well.
3) Personal Expenditures
This is a big one for small businesses as your personal income gets tied into how well the business is doing. If you live a high life style then no matter how well your business does, it may still not be enough. I've seen many good businesses close because of the owner's lifestyle.
One of the best things we ever did when we started our small business was to reduce as much of our personal debt as we could. In the early formative years, we could survive our business down cycles because we literally could skip a pay check until things improved. We even bought the smallest house on our block -we call it our 7 Eleven house because if the business failed we could get jobs at the local 7 Eleven and still pay the mortgage. A good thing about being under capitalized is that you get creative and strive to make fewer mistakes since mistakes cost money that you don't have. Running lean is really great when you start to do better. Keeping your expenditures low is never a bad thing.
4) Lack of a plan
Lack of a plan is like taxes in that it doesn't really hit you immediately but it can be deadly in the end. You could open and run your business for awhile before you realize that you needed a strong direction or a costly course correction. A lot of small businesses open with a general plan usually kept in the owner's head. Never start a business without researching your market and creating a business plan. Most small business owners will write a business plan in attempts of getting a loan, but it's a necessary road map for your entrepreneurial journey. You can just hop in your car and drive without a plan or map, but you may not like where you end up. Shooting from the hip now can cost you serious capital later - never start a business without a business plan.
One advice that I can give about business plans that I only recently started including in my plans is an exit strategy. After owning a business for over twenty years, I realized that when I was younger, it never crossed my mind that I would eventually want to move on to other projects and may want to get out of the business. Your business often will look and operate better if you build it with the intention of making it attractive enough to sell one day - you tend to make different choices.
5) Personal Habits
In a large company, your personal habits don't effect the business as directly since there are usually more layers. If you're sloppy then your business will tend to be sloppy. For the most part, your business will take on your personality and habits. The great thing about it is if you train yourself to have just a few good habits performed daily you can actually set your business on a great path without having to think about it. Of course, if you have bad habits, you can easily ruin your business without thinking about it - not thinking about it is how habits work.
It's difficult to make a small business work, but with little cash reserves or available credit lines its very difficult but not impossible. You just have to avoid the major business killers. In the end, there are very few things more satisfying than making one of your dreams come to life. That fact that it is hard won makes it even more enjoyable.