Your funding has been approved with the bank or granted via investors—congratulations!
Now, the really fun part can begin: the spending. You may have a sudden, overwhelming desire to spend to your heart’s content, but it is important to act responsibly and follow the spending plan laid out in your business plan if your business is to survive its critical early years.
How to spend your startup funds is the most important decision a business faces at this crucial stage. That being said, fiscal responsibility isn’t something great leaders are born with—it’s often learned through trial and error.
Looking for some shortcuts in the capital spending learning curve? We’ve compiled five do’s and don’ts that every business owner should follow.
1. Don’t go on an (unplanned) buying spree
It can be incredibly irresistible, once funding comes through, to go on a buying spree for everything from company tech to office chairs. You must fight these urges, though, and only spend on what you truly need to get started.
Take a moment and step back to review the business plan that you worked so hard on. The details within those pages will remind you of the spending strategy you outlined to get your business off the ground. Look closely at your cash flow forecast so that you can spend accordingly.
According to 2016 statistics published by the Small Business Administration (SBA), only about 78 percent of small business startups survive the first year, and only half make it to the five year point. With this in mind, it is imperative to spend capital wisely to make sure your business finds success.
Areas to avoid spending funds:
Before making the following purchases, go back to that business plan and determine if they fit in the parameters that you set for your budget and financing.
- Fancy office space and furniture
- Expensive equipment
- Unnecessarily overpriced clothing
- Pricey business trips and lunches
- Expensive printing costs
Are these essential to your business? If you’re looking to be cost-effective in this arena, try using a spare bedroom within your home as a makeshift office; instead of buying expensive copy machines and printers, take advantage of print services at a local library; in the event a suit is absolutely required to impress prospective clients, simply rent or borrow a smart blazer from a local tailor or a friend.
If you need a physical location for customers to visit, look for a creative spot that has a smaller price tag. You can always upgrade all of these items as your business starts to bring in revenue.
2. Create a must-have list
One of the most common mistakes a failed business can make is operating with either insufficient funds or poor fiscal management overall. To combat this fatal error, try to create a list of absolute must-haves your business cannot live without.
Here is a list of undeniably essential expenses most successful businesses should budget for during their first year:
- A competent CFO or accountant
- Legal advice/tech support
- Customer service/branding
You don’t need to pay top dollar for these items—but keep in mind that paying for quality in these areas is essential. For more info on must-haves, check out our new business owner checklist download.
3. Evaluate technology needs
When it comes to investments at the startup level, really assess your technology needs. There are a lot of software and upgrades available, but make sure you measure these purchases against your actual needs to run your business.
Spending money unnecessarily on elaborate computer systems and hardware prove to be fatal mistakes for fledgling companies. While being able to answer emails on a large tablet-sized screen may be convenient, it can be done just as easily on a smartphone you already own.
That being said, intelligent spending on technology that promotes future marketing and sales campaign successes is always a good idea. It is in these small decisions that financially responsible business owners are born and truly thrive.
4. Invest in minimal staff
The backbone of any great business is a strong support staff. Most businesses only require one or two essential members on staff to start, and some need no one other than the owner.
Outsourcing to experts or knowledgeable friends and family at the get-go frees capital that would go toward salaries, and can provide a buffer for unexpected expenses. It may become essential to hire new staff members as a company grows, but it is important to remember to proceed only if it makes financial sense to do so.
5. Create a backup plan
It is the goal of any new company to reach, at the very least, the break-even point in the first fiscal year. This important measure signifies that profits are equal to expenses and up front capital investment.
When allocating profits and funding, always be prepared. In the event that a company doesn’t break-even by the end of the year, having access to some savings or backup funds can be critical. Some corporations don’t reach break-even until their second or third year of operation, so be prepared for this.
Warren Buffet once famously said, “Do not save what is left after spending, but spend what is left after saving,” and this advice still rings true. Smart fiscal choices bring success in the long run. If you aren’t able to put money away, look into the different SBA loans that can be used as a financial backup to keep you afloat.
Remember that your business plan is your blueprint and your path to profitability; referencing it will help you figure out whether you can afford to take on more debt for the long-term health of your business. Using your business plan as a living document can help guide financial and staffing decisions based on your own data and profit and loss projections.
Financial forethought can truly be the deciding factor between failing quickly or building a successful business that is around for years to come. Obtaining funding for your business is an exciting accomplishment; spend wisely and always be prepared for the unexpected.