There are few things in life that are more exciting than starting up a business. The countless possibilities that lay before you present you with the opportunity for an experience that you won’t find working a 9-to-5 job.
Running your own business gives you the freedom to do the work that you love, choose when you work, and build up your net worth so that your future is secure.
But the majority of new businesses fail within a short period of time. According to the US Bureau of Labor Statistics, 1 in 5 new businesses shut down within two years of operating. Nearly 5 in 10 have ceased operating within five years and almost 7 in 10 have closed before they’re a decade old. Its data shows that only one-quarter of all businesses make it past 15 years.
One of the biggest reasons for these failures is that businesses are unable to sustain (or even achieve) a reasonable level of profitability or maintain a positive cash flow. This is especially true for anyone that’s unable to bootstrap their business or acquire large investment through crowdfunding or a venture capitalist.
Whether they’re bootstrapping or using external finance to get their new business off the ground, entrepreneurs need to reduce their own personal churn rate. If they don’t they need to draw more cash from their venture, which can be difficult in the early years.
In his book “How to Get Rich”, Felix Dennis talked about how he lived in squalid conditions while he was trying to get his business off the ground. In the opening section, he even warned anyone looking to build a business that they must be willing to sacrifice everything, including most comforts that people take for granted.
It’s therefore vital for entrepreneurs to be smart with their money. Here’s how they can do that.
Slash Your Spending
The easiest way to reduce the amount of money that you need to take out of your business is to not spend much on yourself. There are countless stories of successful entrepreneurs sleeping in their offices, couch surfing, and eating only basic foods.
One of these was Warren Buffett, who reportedly only ate cheese sandwiches for years. Even today, he still buys his breakfast at McDonald’s using coupons and bases his order on how well his stocks are doing, despite being worth more than $80 billion.
Cutting down on your living costs can be achieved in many ways. Living with parents, friends or other relatives can really help keep money in your pocket. As can reducing how often you eat out at restaurants, cutting back on travel and other recreational expenses.
Get rid of your expensive phone data plan, make do with the clothes you own now, and ditch your subscriptions like Netflix and Spotify.
Cutting your spending doesn’t mean you have to go without anything. You can just be smart with how you spend your money on non-essential things. Like Warren Buffett, you can use coupons and other promotions to reduce the cost of the money that you do spend.
You can find them for just about any product or service, from groceries to restaurant deals. For example, if you’re going travelling (everyone needs a break) then you could look for special discounts on hotel stays or travel tickets. Another everyday example would be for sports fans who like to bet on their teams. Most major sportsbooks even offer free bets that you can use to wager on games. You can’t get much cheaper than free, right?
If you have trouble limiting your spending, then one of the best ways that you can get on top of this is to set a budget.
“Not being good with money” is not an excuse for this. If you’re an entrepreneur, then you already need to make sure that your business is managed in a fiscally prudent way, otherwise, it’ll likely fail anyway. For example, you wouldn’t waste money on buying products from your suppliers or server capacity that you didn’t need, so why would you do the same with food or rent?
Budgeting doesn’t have to be difficult. If you’re familiar with the budgets for your business, then there’s no reason that you couldn’t use a modified version of this for your own personal needs.
Alternatively, there are plenty of budgeting apps that you can use to save you time. Some of these apps can connect to your bank account, analyze and categorize your transactions so you can see how much you’ve spent against your plan. You can even use apps to track expenses to make things even easier for you at the end of the month.
However you decide to create your budget, it’s important to keep checking it to make sure that you’re staying on track. If you’re not, then you won’t know whether you’re spending too much, or whether you can afford to spend more.
You should also make tweaks to your budget as you go. You may find that you can actually spend less on food, so reducing your budget for it, you can either save more or allocate some to another area.
While you should try to keep your spending as low as possible, you should make sure that you leave a small pot of money aside for yourself each month. This can be spent on any of the things you enjoy doing, whether that’s gaming, going to restaurants, or visiting the movies. This helps you to be more relaxed and will make you more productive while you’re working.
Don’t Fall Into the Status Trap
When some people start a business, they let their ego get out of hand. The status of being a CEO or Director can make some people spend more money so that they have all the clothes, cars, gadgets and other material goods that they associate with it.
The same applies to business expenses, you often don’t need to attend conferences or get a fancy office right at the beginning of your journey.
The reality is, if you’re an entrepreneur who’s just set up a business you’ll be earning less than most salaried employees and spending money you don’t have to buy things you don’t need is going to keep it that way for longer.
The phrase “fake it ‘til you make it” is banded about a lot but this cliché has been widely criticized by many business people and journalists. Instead, the psychologist Lisa Quast suggests you should work on your weaknesses rather than trying to impress people.
When you don’t feel pressured to impress people, then you won’t feel the need to spend money on things that aren’t necessary.