This is the first in a series of articles themed around the recession-preneur. Tight budgets leave little room for error for the recession-preneur so this series is designed to help you avoid some of the more common pitfalls when starting a new business.
So for one reason or another, you’ve decided to start your own business. Congratulations! You’ve taken a big step. Whether you’ve been laid off, starting something while still working full time or planning a big new venture this one mistake can sink your business faster than most any other mistake. I have helped hundreds of businesses get started and this mistake consistently gets new business owners in more trouble than any other. And when I tell you what it is you’re likely to say, “well, duh”. But I said it was simple, but you would be amazed at how difficult it can become.
When you start your business you’ve made a big decision and a very exciting decision. And most people get very wrapped up in that emotion and excitement, so what is the first thing they start going…spending money. And they end up spending too much money too soon, often before they have even made their first dollar. Combine this with an aggressive sales projection in your cash flow plan (you do have a cash flow projection in your business plan, right?!?) and you can see how easy it is to get sunk real quick.
But I see it time and time again and no amount of advice will dissuade some people’s misdirected enthusiasm. I have a friend (not a client) who had a tremendous idea for a web 2.0 business. And it is a good idea and could still be a profitable one. But, my friend sunk $80,000 into development before testing the waters in more affordable ways. Now he has an $80,000 dysfunctional website and never a dollar of revenue. The best way to avoid the trap is to have a solid business plan and let someone review who isn’t afraid to criticize it, then listen to their feedback. Now the worst part of being an entrepreneur is the discouragement from others, but don’t be so blind that you turn away good advice, preferably from someone who has been down this road before you.
Also, remember that you are excited! Your sales forecast is probably optimistic and your expense forecast not conservative enough. Keep thinking it over until you can figure out how to do more with less. Keep thinking of creative ways to test the waters before sinking cash into the idea. It doesn’t matter if you are starting your business with $200 or $2,000,000. This principle is consistent. Only spend what you need to generate revenue. As long as you are in startup phase, it is not negotiable. Once you are stable as a business, the other perks can come, but till then, only spend what you need to generate revenue and apply that test to every dollar you spend.
Finally, there’s a real tax consideration behind all this too. Technically, the IRS requires that any costs you incur prior to the first dollar of revenue you earn are considered start up costs. Start up costs must be amortized over five years! So now 4/5ths of everything you spend before earning any revenue has flipped and become taxable income in a sense. Some forethought and planning can avoid this predicament in a lot of cases. Sometimes it’s just unavoidable because of your business model, but wouldn’t you like to have the option at the start? Me too.
As always, if you have questions or would like help with your business or taxes, feel free to e-mail me at James(at)RainwaterCPA.com.