Is Your Business Unprofitable at First?

If you’re thinking about starting a new business, you can’t expect to be lucrative right away.

The first few years of a company’s existence are the most difficult. In fact, one-quarter of firms fail within the first year, and the majority take 18 to 24 months to become profitable. And instead of going into the owner’s pockets, those early revenues are frequently reinvested in the business. Furthermore, even once you start making consistent profits, success can be difficult to come by—half of all firms fail within five years.

That’s not to say you shouldn’t pursue your ambition of creating your own company.

It only goes to show how important it is to plan for lean times so you don’t have to worry if your company doesn’t produce as much money as you anticipated at the start.

I would urge any entrepreneur, but especially those who are just starting out, to make a personal budget. It’s understandable if you want to concentrate solely on your business. However, you should pay attention to your personal financial plan as well. Even if your business isn’t profitable at first, you’ll have more time for it in the long run (not to mention a lot less stress in your life) if you know your own financial status is safe.

With that in mind, implement the following sensible budgeting strategies before you experience any financial difficulties:

1) Maintain Financial Reserves For Both Your Company And Yourself.

If you quit a well-paying job to establish your own company, you should be commended for your courage and desire to pursue your aspirations. However, you must be prepared for a significant change in your financial situation. Most small business owners make an average of $40,000 per year in their first five years of operation, according to estimates. The good news is that even if your firm isn’t lucrative, you can still earn a wage.

The bad news is that if you don’t have a viable business to start, you can feel guilty or reckless if you take anything less than the minimum wage you can survive on. In either case, business owners don’t usually make a lot of money, at least not at first.

Put some money aside for personal needs in the same manner that you should have financial reserves for work expenses. So, how much cash should you have in your bank account? To cover basic expenses and any “what-ifs,” I recommend having 1.5 years’ worth of cash on hand. However, I recognize that this is a significant sum of money to save, particularly for someone who formerly earned a consistent paycheck but now has an income that is utterly uncertain.

Nobody wants to save money for a rainy day when things are already tight, which is why it’s critical to plan ahead when beginning a business.

Related: To Meet Growth in Every Area, You Need Brainpower

Budgeting apps like BrightPlan or Mint can be particularly useful for figuring out where your money is going and putting more money into savings. When my husband and I began evaluating our spending, we were surprised to learn how much money we spent on eating out (far more than we had anticipated!). Getting visibility into all of your spendings is the first step toward budgeting efficiently and saving as much as possible.

2) Set Aside Money to Reinvest in the Company.

Your business is your kid as an entrepreneur. You want to do everything you can to help it succeed, and you’re probably giddy with anticipation. You now have complete control over your professional life and are able to take advantage of new prospects.

However, this enthusiasm can cause many entrepreneurs to put as much of their own money into the business as they can, which often leads to two outcomes: they jeopardize their personal finances, and they still need to raise additional funds to run a viable business.

Budget how much of your revenue you can put back into the firm instead of investing every extra penny. I recommend adopting a strategy called reverse budgeting to make this process simpler because it can be an emotional one. You calculate how much money you’ll need to meet all of your own expenses, such as bills and retirement savings. The money is then immediately transferred to your savings account so you don’t have to worry about it. You can put whatever money you have left into the business without jeopardizing your own well-being.

Related: The Importance of Keeping Things in Perspective

3) Understand How to Save Money.

Will my company be profitable? Is it possible for me to transform a good idea into a viable business? These are the kinds of concerns that keep business owners awake at night. Fear of failure is unavoidable, which means that preparation should be as well.

Even if you start building up your cash reserves and putting crucial saves on automatic, you may still run out of money. When this happens, there’s only one thing to do: tighten your belt.

Of course, this isn’t easy, but entrepreneurs are extremely motivated in their businesses. If achieving success in ten years involves sacrificing some creature comforts in the meanwhile, the sacrifice seems more worthwhile.

Look for any unnecessary expenses, such as subscriptions you don’t use (or need), extravagances you can do without (like eating out instead of cooking at home), or housing fees you can cut (such as a landline you don’t know the number for). Be conscious of what you can’t cut at the same time (things like debt payments, for instance).

Related: 7 Tips for Making Your Business Pop (Brand Storytelling Guide)

The whole goal of financial planning for business owners is to make sensible short-term decisions that will place them in a better long-term position.

Cash flow problems are the most prevalent and difficult for new enterprises, but they’re also widespread and problematic for entrepreneurs. Prepare yourself for the expected tough times ahead, particularly when it comes to your own money. A well-planned budget makes it easier to deal with them.

This information is provided solely for educational reasons and should not be construed as investment, tax, legal, or accounting advice. Investing entails some level of risk. Past results are no guarantee of future outcomes. Diversification does not guarantee a profit or protect you from a loss. You should seek the advice of your own tax, legal, and accounting professionals.

Leave a Reply

Your email address will not be published.