Welcome to our Talking Business podcast series on the lifecycle of a business with expert Eddie Senatore. He’s shared with us a great overview of what it’s like to run a business, from initial startup to maturity. Here we go over Phase 1: Startup.
One day, sick of working for “the man”, you set out to chase your dreams by starting your own business. You’re excited, but need to keep in mind four major challenges:
Going from zero to one
A new business has no initial credibility in the marketplace. You’ll need to work hard to get your first sales. Until that happens, you need to manage your fixed costs (office space, manufacturing, and so on).That may mean running losses for a while, taking on debt to cover costs.
Managing the workflow properly
You’re the founder, so of course you’re passionate and enthusiastic and happy to do the work. However, there’s lots to be done and these tasks will need to be tackled in a systematic way (e.g. managing finances, running marketing campaigns, designing products). With return on investment being small or negative in the early months, establishing these systems so you can scale effectively is critical.
Watching cash flow is key
You’ve delivered products and/or services to a client. They haven’t paid you yet. Your suppliers are wondering when you’re going to pay them.
Do what you can to bring some sanity into the cash flow process.
Always keep your financial planning in mind
Once you’ve managed to tackle these first few items, you need to plan for the future with good reports. How much travel did you do? How many sales did you have? Where do you see the company going in one month, six months, two years?
- Going from zero to sales
- Managing the workflow properly
- Watching cash flow is key, and
- Always keep your financial planning in mind.
A strong grip on these challenges from the get-go can make a big difference for the future health of your business.
Preparing for the Startup phase
A business may fail for a number of reasons. In general, external problems exacerbating internal issues can create a crisis. Eddie talks about the challenges a business will face in the initial, startup phase.
Eddie’s looked at the literature, and a lifecycle analysis is really helpful for looking at critical factors in business success. The first phase in a business lifecycle is startup: you’ve got a good business idea and want to pursue it on your own terms, so you start a business.
The next phase is survival, followed by growth, expansion, and maturity. More on those in the next episodes.
The four critical issues facing a startup
Let’s look at the problems you might face at the startup phase.
- First, you’ve got to go out and get some sales, which is really hard at the beginning. You may be running into losses, which means not covering your fixed costs from business revenue. Since you need to put money into the business to keep it operating, you’ll likely have to pull money out of your bank accounts or take on debt to cover the costs while your business takes on losses. You’re going to be running thin on the ground.
- Another critical factor in the startup phase is management. You’re the enthusiastic founder, working really hard at it, but how do you scale from that? You’ll need a management plan, a marketing plan, a customer acquisition plan, and so on. That’s a lot of time put into establishing a business management plan, time that can’t be spent directly on sales. This means your revenue may not be that great while you plan the management of your company.
- The third issue is cash flow. You work for a client and invoice them. You’re waiting on payment. In the meantime, your suppliers are wondering where their money is, so you need to pay them. This can mean running into overdraft on your bank accounts, piling on more debt and interests costs.
- The last issue is financial control. This relates somewhat to the management issue we discussed earlier.
Once you’ve got enough sales to start getting some good cash flow, you need to make financial plans for the future. You’ll be reviewing all your business costs to date. You have to look over what’s been happening in the business, what’s going to happen next month, and what’s going to happen in the next six months. It’s key here to invest time in planning and investing time into crafting good, detailed reports about the health of your business.
Highlighting the negatives to secure a business’s future
Eddie’s sounding quite negative here, but it’s for a good reason. The downsides to a startup can be pretty horrific: you have no credibility in the marketplace and no business assets, so you’re putting your personal assets on the line to chase an entrepreneurial dream.
Highlighting the negatives lets us tackle these issues from the get-go, allowing us to pursue this passion project within our natural limitations. If you don’t have financial management expertise, then you need to get on top of your budget on a regular basis to mitigate that. Maybe you should take a short online course on budgeting to get up to speed.
As long as you’re planning and you know what your investment is, you can be prepared!
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