3 effective techniques small entrepreneurs and business owners can do to avoid failure in the first year of their business
As a small business owner, start-up entrepreneur or solopreneur, your entire life is about two things: struggling and focus.
Your struggling goes on three things at once:
- To pay your debts (past or present)
- To cover your current expenses
- To gather the money you need to invest in your future
Your focus is divided between two questions:
- What’s the best business that I can do? (ideally to be also passionate about)
- Where do I get the money I need to start my business?
You already found out there are not too many options available for nano entrepreneurs when it comes to funding their first or their new business startup. At their best, the amounts (potentially) available are very small, or too small to cover your beginning phase which in most of the cases it is under evaluated as time and money.
You are almost debilitated by how hard it is and your magic energy often challenges you with its ups and downs. You doubt yourself and your resilience capacity almost everyday, but necessity and passion push you further. You can talk better than anyone else about the power of hope.
As a small entrepreneurs there are a few techniques you can apply to avoid failure in the first year of your business, to beat the odds and to rise above the stats. I highlighted for this post three of them:
1/ Estimate your cash flow better
One of the reasons most of the small entrepreneurs don’t survive their first year of business is cash flow. The lack of well calculated cash leads to bankruptcy even in the case of big companies. Cash is everything in all business stages, but its estimation plays a decisive role in the beginning, especially when you start from a very small premise.
The cash needed to cover the beginning is usually calculated by small entrepreneurs to cover 6 – 12 months and it seldom covers with fidelity the costs with not good enough preparation and research, crisis and other unexpected costs. In the case of start-up entrepreneurs and small business owners these costs are always higher. For this reason the money expected to cover 12 months, hardly covers 4-6 months and somewhere by the 8th month, the business is out of the game.
In corporations and in places based on auctioning offers, the principle applied is to make an ‘accurate’ budget, meaning that a lot of costs are not approved, or, in the auction case, you risk to lose the deal in the favour of a better offer regardless the fact that after winning the auction, the price usually goes up exactly because of the ‘accurate’ rule. It’s a nonsense I never understood that is not helping you too much in the cost control area.
In nano businesses, if you make an ‘accurate budget’ you set yourself for failure.
Tempted by your idea and skills, by your team and/or by keeping the costs and risks low, many investors push for small business budgets hoping that putting enough pressure (dressed as ‘motivation’) on the entrepreneurs, magic will happen.
Magic does not happen on this route. With all major investment funds, mentors, networks and all sorts of accelerators and incubators all over the world (business angels, VC, hackathons, etc), stats and facts look the same as always. Horrible. over 80% fail in their first year and less than 50% reach their third year of business. Some of these investors live in bubbles and some are hunting the jackpot and the unicorns, because they focus on portfolio management (if we bet on 10 startups, 1 may be the unicorn and 2-3 will be ok, we win). If they focused to make small businesses work, to create the infrastructure needed for that purpose, things would have been much more differently. They are not, so you are on your own.
To make sure you cover your beginning phase in controllable conditions and that you don’t get stuck in the middle of the road, operate the following adjustments to your business startup budget:
- Crisis fund: 5-10% of the total budget
- Unexpected expenses fund: 5-10% of the total budget
- Put over 30% more time over what you initially estimated as duration (if you think it will take 6 months to be ready and fully authorized to sell, then estimate 10-12 months)
- When you estimate your revenues, cut off 50%
Now, do the cash flow for 12 months (money coming and going month after month). Once you start your business, schedule your in/out cash day by day or according to your business profile. The more detailed, the better. The cash flow is nothing fancy, it is just the calendar of your in/out money.
Once you finish your 12 month cash flow, do it for 24, 36, 48 and 60 months. You can see better where you can operate changes, as they will affect your cash flow.
By doing the cash flow first, you’ll see better at what point on your business timeline you can afford buying more things to increase or diversify your selling capacity, your revenues.
Now that your budget and cash flow are more realistically estimated, you have a clearer visions about the real amount of money you need to start and to survive in reasonable conditions until you reach the break even point (profit=zero) and where ad when you’ll manage to go above it.
Knowing that, it makes you more resilient and resourceful in finding the money you need for your business, but also to better plan your implementation phases. You would not want to spend it just to fail in the midst of action. Once you set yourself for action, for execution, you want to make sure you have what it takes to get over the most difficult phase: the beginning.
When you make your own budget, you are also tempted to over estimate revenues and under estimate costs and time. Detach yourself from it and imagine you are doing it for somebody else.
2/ Design and optimize your operations flow (action plan)
Numbers have the quality to align your neurons in your head. They get the clutter down and allow you to stick to the facts, they help you be a good navigator.
In the absence of numbers, you think you’ll implement things in a way. Once you crunch the numbers, you’ll realize there are better moments in the process to do some of the things you planned.
Making your action plan as detailed as possible, it will uplift your clarity. Clarity sharps your precision and precision leads you faster and better to achieving your goals in the estimated time. It will also help you anticipate threats and vulnerabilities in due time, so you can take proper action to avoid unnecessary risks and crisis.
Make more than one action plan scenario and recalculate the budget and the cash flow for each version. You’ll notice substantial differences and you’ll better understand what’s the best route to take for implementation.
3/ Keep an eye on the wallet and don’t mix business expenses and money with your own expenses and money
Now, once you get down to action, keep a very strict evidence of each penny. Money is volatile, you don’t feel when it’s gone. Now it’s here, now it isn’t anymore.
When you are nano, money is not enough to cover both your business and your personal life necessities, but you need to find a balance, to improvise and to maintain a very strict distinction.
Keep an eye on the wallet. Exercise your money discipline.
What makes it or breaks it here, it’s your vision. That is what will give you the strength, the wisdom and the inspiration needed when adversities confuse you and life puts you down.
Your vision fuels your motivation in the most challenging times and lights your way out of darkness.