From a very young age – a successful entrepreneur himself – told me that a solid business would start showing a appropriate profit within 2 years of opening its doors. To this day, I still use that formula when evaluating new ideas; whilst there’s no empirical evidence that suggests this works, it has thus far been a pretty safe investment & choice on my part.
If you consider that 2 year timeframe, you need to evaluate whether you have sufficient financing to carry you for the two years that you need to reach profitability. The biggest concern here isn’t the fact that you need to be profitable (break-even would for example be fine as well), but every startup needs to be cash flow positive. So many business ultimately fail not because they don’t have a profitable or sustainable idea, but because they don’t have cash at the right times and thus aren’t able to continue paying their bills.
You would thus need to manage your finances conservatively and accurately, with the focus on being in control. I’ve always felt that as long as I knew exactly what was happening in my finances (albeit good or bad), that I could back myself to find applicable short and long term solutions for potential issues that may arise.
You should thus always know what your accounts look like and to give yourself enough space to find a solution if an emergency strikes, you need to ensure that you have enough funds in reserve to buy yourself some time.
Bootstrapping
The best way to give your finances are chance of surviving the startup phase, is by proper bootstrapping across the board. This means that you need to evaluate every cash outflow, irrespective of whether they are capital outlays or simply just expenditure. Don’t waste money on things you really don’t need.
This also means that you should only reinvest earnings into the business if you are relatively sure that it would lead to increases in your ultimate earnings. If not, then that cash has a better use just sitting in your bank account waiting for the day that you actually need it.
I’m not suggesting that you shouldn’t allow yourself a few luxuries (as this is one of the benefits of being the boss), but those should make up a small percentage of your expenditure and it should never jeopardize the long term viability of your business. If buying yourself a new Mac means that you may not be able to pay office rent next month, then you probably shouldn’t buy that Mac.
If you bootstrap the business for long enough, you will eventually reach a level where you can spend more significant amounts of money without actually jeopardizing the business. So be patient initially and make sure that you bootstrap as much of your activities as possible.
