The first year for any business is all about survival. According to the Department of Labor, 80 percent of small businesses make it through the first year, but that number begins to tumble as time progresses. 30 percent of small businesses fail in their second year; 50 percent fail within five years, and a staggering 70 percent fail within a decade. What gives?
Solidify a Plan for the Future
A solid business plan that addresses primary needs in both the short and long term is the best weapon against failure in any entrepreneur’s arsenal.
Most importantly, your business plan should include accurate and honest financial projections. We all want to be millionaires, but few understand the workload that goes into making that aspiration a reality.
You also need to conduct extensive market research while writing your business plan. The knowledge gleaned from this research can help you predict any problems that may arise in the future. If you’re the third pizza place to open in your neighborhood, you will obviously be heavily competing for customers. You’ll need to find a way to set yourself apart from the pack.
Keep Expenses Low
Even though there are myriad opportunities for small businesses to find funding, running out of money is often the leading cause of failure. So, it’s very important for entrepreneurs to make considerable efforts to keep expenses low during the first year of operation.
If you want to open a farm-to-table restaurant, but have scant funding to do so, it may be better to start small. Offer a few affordable farm-to-table options and grow your menu as your revenue stream expands. Eventually, you’ll hit your mark. Just remember—patience is key.
One way to make your revenue go farther is to reinvest it as often as possible. There may be months where you don’t take a paycheck. That timeframe could extend through your entire first year. In either case, reinvesting profits back into the business can extend the life of your business. And that’s really the goal, isn’t it?
There are three rules to remember when reinvesting your money. First, don’t let arbitrary percentage rules determine how much you reinvest. Some financial advisors will tell you to reinvest 15 to 20 percent of your profits into the business. But, if you can afford to invest more, do it. Money is the lifeline of any business. Don’t starve yours in an effort to maintain a comfortable lifestyle.
Second, invest in your staff. As Richard Branson, CEO of Virgin, says, “You need to take care of the people who take care of your clients.” This ensures that your customers and staff are equally happy. This is also a secret of Warren Buffet’s success.
Third, take out strategic loans. Being short on cash isn’t the only reason to take out a loan. It needs to serve your business strategically. If you need a cash infusion to carry out an expansive marketing plan that will generate new revenue streams, take out a loan. If you’re simply worried about whether or not the cash in your bank account will last, avoid loans altogether. Have a strategy and stick to it.