Only half of all small businesses make it into their fifth year. Reasons for failure range from the owner’s abilities and poor customer service to dated offerings. There is one glaring aspect of nearly every failed small business – overspending.
Expenditures come in a variety of forms. The most common and costly expenses include the staff, taxes, equipment, space, inventory, business services and financing.
Staffing is an area that’s directly under your control. In the first few years, save money by doing the work yourself, earning the rate you would pay a staff member. Save the remaining net income for operating capital.
Too many owners hire a staff and then struggle to save or break even. Working in the business will make you a more effective manager and empathetic leader. Focus on building cash reserves. As a general rule, it’s good to keep at least three months worth of expenses in your cash account. Personally, we try to keep six months of operating capital within easy reach.
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Equipment, space and business services are either needs or wants. While you may want an office at Glenwood South, a bedroom converted to a home office or shared office space might make more sense.
I’ve observed a number of smart business moves over the past five years. Mobile massage is an example. The masseuse invests in top notch mobile equipment then delivers services in their clients’ homes or place of work. The overall cost is much lower than opening a spa.
You want a new DSLR camera for product photography. However, you need a used point and shoot. Once you get three months operating capital in the bank, revisit the camera. The same holds true for business services. The phone and cable company offers you a dedicated T-1 line for Internet and phone service. It’s nice to have, but the speed and quality of basic business Internet and digital voice service will allow you to reduce costs by $500 a month on average.
You have to be willing to look at each expense and see what alternatives exist. The key to business longevity is positive cash flow. Without it, solving other operational problems is wasted time.
Jeremy Sisk is owner of Durham marketing firm Xperience4Higher. Reach him at firstname.lastname@example.org.