So You Want To Start a Business? A Note To 23-Year-Old Me Part 1

I was twenty-three when the first elements of my business plan started coming together. In the years since that time, I've learned some valuable and difficult lessons about founding, leading, and growing a company from the ground up. I recently came across some notes I made back then, and the thought crossed my mind that I sure wish I could go back and tell that guy a few things. This series of blog posts will cover the first five things that I'd share with someone about to embark on the adventure of starting a company. Here's number one.

1. The importance of capital and cash flow. Working capital (cash) is the lifeblood of a company.  Run short of it, and your business will suffer. The adage that "cash is king" is true. You can have the most ambitious growth plan or most brilliant idea in the world, but if you get to the third quarter of operations and you can't make payroll or pay your taxes, you'll be in deep trouble. Our system is known as capitalism for a reason, business operations require capital, and much more of it than you'd think. Most good entrepreneurs focus on "we need to turn a profit". Wise entrepreneurs understand that even if you turn a profit, if you are leading a growing firm your profit most likely won't be enough to fuel your growth by itself. You should be prepared for years of reviewing your financial reports, seeing a profit, and knowing that profit will need to be left in the company in order to power growth. The faster your growth rate, the more cash your business will need. In a services business, the cost of labor will be your largest expense, and salary is only a part of it. Health insurance, payroll tax, furniture, computers, software licenses, vacation, training costs, and a seemingly never ending list of other expenses will make you understand the saying that, "our people are our largest asset" from a whole new perspective. For planning purposes, multiply the cost of salary by 1.4 to get a better idea of the true cost of a team member.

There's a lag between when you will need to hire people and when they are profitable. This lag takes cash to bridge. Cash from outside sources will be expensive, so it's always better to self fund it if possible. You'll need to become an expert at forecasting, and you'll need to develop this skill in your subordinate leaders. Sometimes you'll pay a new hire for months and then realize it's not a good fit. As time goes on you'll get better at spotting this early and avoiding it altogether, but it will still happen. The need for working capital isn't just an early stage concern, the need will increase in direct correlation to the growth of your organization. It is entirely possible in a growing business to finish the year with 1 million in earnings and still have to borrow money to continue operations. Be ready for this and expect it, you'll need to establish good relationships with a bank, and this will take time. They won't talk with you at first, but once you build up a track record of success. Know that you'll most likely have to go without a salary for long stretches of time. Prepare your family and your personal finances for this so you can get through it. Home equity lines of credit and credit card debt are your backup financing. Get used to putting it all on the line continually. You'll be signing for and personally guaranteeing all of the company's debt and legal obligations as well (such as payroll tax), so get comfortable with the idea of being personally accountable for all of it. People will count on you, so you better show wisdom and maturity in your every decision, action, and conversation.

Oh, and by the way, remember those earnings that you left in the company? You'll need to pay about a third of that to the government in taxes. This will need to be in the form of cash.


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