Money Doesn’t Knock - Financing A Business (Part 3)

By admin • December 27, 2008 • Filed in: Financial

This is the final installment in a three part series of options to start or finance a business.
Part 1- Conventional and SBA Loans
Part 2- Unconventional finance methods
Part 3- Self-finance (pay as you go)

Starting a business is always easy, the catch is making Return-On-Investment (ROI) quick enough that the business (and business owner) can survive. Most businesses take two years to get established and making steady revenue to pay for itself and support the owner. Also note, a third of all businesses fail within the first two years. Being capitalized to make it the first two years is important, still many have been able to survive without start-up capital and live tell the tale.

Financing a business is key. Having capital in the form of debt can help a business survive the first two years but can also be the heaviest burden. Covering the monthly note plus regular business expenses may not be possible initially. Unless the business is retail front oriented and manufacturing, starting at home (or a very modest office) with little as possible maybe the best option. Funding the business with revenue as it is earned has the benefit of keeping a business fit from conception. Every expenditure will be analyzed for value and necessity, the disciplined developed will be vital throughout the life of the business.

Taking Care of The Home Front

Maslow’s hierarchy of needs dictates that physical survival is the most basic need, and without that foundation other needs cannot be achieved. Therefore in business, making sure one has a home and food is basic survival. With age comes added responsibilities of family, mortgage, car note, etc. and indispensable luxuries. Everyone will have a different definition of basic survival for himself or herself. Regardless what that definition may be, to pursue a business venture that definition must be measured. That is exactly how much are monthly basic living expenses?

One of my mentors in his rookie year sat down and established just how much he needed to live. He was not conservative with his estimate either. He was sure to include savings, entertainment, dining out, etc. When sitting and establishing a personal budget there will be a temptation to be conservative, and with the quiet of a pen on paper there will be unrealistic sacrifices planned. Do not think a daily meal of military MRE’s is possible when the truth is the planner currently eats out every night. Best to measure current living expenses.

It has been said that every person has a standard of living that they are comfortable with and will do what is needed to maintain. With that in mind, I suggest that one measure their past month of expenses if that month could be considered an average month, a comfortable month. It is very important to be realistic about what the expenses will be. Also, measure quarterly and yearly expenses like oil changes, or taxes, car insurance, etc. Depending if they are quarterly or yearly, divide by three or twelve, and add that portion into each month’s expenses.

Once that living expenses are measured, the self-financier will know exactly where ROI begins. Should $3,000 a month be necessary for living, then you know to live you must not only bring in $3,000 but be able to bring out of the business $3,000.

Profitability

Just as living expenses need to be measured so do business expenses. This will be harder than living expenses because as a new business there may not be a past to measure. This leaves one with speculation and that is never good. Just like living, do not be overly conservative. However, it has been my experience that most new business owners are too liberal in the expected experiences. They can do with much less than expected. Without experience they have a perception what being in business is. In their minds being in business means having a $60 per month business landline, when they will never be in the office to take a phone call. A $30 per month cell phone (with unlimited calling) would be more cost effective. They run to Office Depot to buy a box of Bic pens when they have drawers full of give-away pens at home. Understand that as an entrepreneur, the owner will ultimately be paying the bills. That means excesses or “necessities” seen/learned in corporate, governments, or education institutions will take on a new perspective. A stocked office supply closet doesn’t seem so wise when the owner is writing a check.

Ultimately:

Living Expenses- be moderately liberal in your measurements
Business Expenses- be very conservative with your estimates

Profit=Revenue - (Living Expenses + Business Expenses)

Hey I Have A Profit!

If after paying business expenses and living expenses, money is left over, that is profit. The biggest question poised to will be what to do with it? Only options are a variation of either spend it or save it. Which does one choose? The best answer would be to have an answer before the question is asked. That is developing a plan now, before business is begun, what will become of profits?

There is nothing to say that a business cannot both spend and save profits. First, designate a percentage that will be paid to the owner. Perhaps ten percent or half of all profits will be withdrawn from the business and given to owner. Nothing wrong with this, and is a strong motivator, keeps a reminder why one is working so hard.

However, I do feel that a lion’s share should be reinvested into a business. Saving cash in a business is not good idea. This not to say that building capital reserves is not a necessity. There will always be unexpected expenses that a reserve fund can cover. However, in good times establishing lines of credit with banks will be in order. These can be used for those unexpected expenses. Keeping the cash working and not sleeping. Profits should be used to grow the business in a detailed and planned manner. That may include new equipment, marketing campaigns, and additional employees; this is forward looking progress for a business. Stashing funds, just because something might happen, will stunt business growth.