By Judy McNary, CFP
When running a business, the first three years set you up for future success. Therefore, if you are self-financing, or bootstrapping, it's important to prepare yourself for financial success during these first three years.
Those who opt to self-finance a new enterprise may do so for a variety of reasons. It may be traditional financing is too costly or not available. Prospective equity investors may demand too large an ownership stake or attach too many strings to the funds. It may simply be that a new entrepreneur wants complete control. Regardless of the reason for bootstrapping, the principles laid out here can put a new business on the path to success.
Whichever type of business owner you are, from consultants or software developers to retail store owners, graphic designers, engineers, photographers, therapists or food distributors, unless you are launching with a pre-established stream of income, it takes approximately three years to get a business off the ground. Here are guidelines that will help you through these early years and position your company for success:
Year 1: Don't Measure Initial Success by Finances Alone
Ideally your business would be a success immediately, but realistically, it takes time to develop interest, and it takes interest to develop customers or clients. By the end of the first year, a new business generally has lost money. Revenues are less than expenses. This is normal and not a reason to throw in the towel. If this is where you are in your new business:
- Surround yourself with supportive people: If a business isn’t an overnight blockbuster, many people are quick to disparage. Steer clear of people with this attitude and spend time with others in situations similar to yours so you can support each other. When someone asks how your business is going, say you’re putting the profits back into the business at this point. This is code to fellow entrepreneurs and they’ll offer words of encouragement. Don’t rely on your spouse to carry the full burden of support. (For related reading, see: 8 Tips for Starting Your Own Business.)
- Keep a tight grip on your spending: Until your revenues rise, your time is not worth as much as your money. Learn how to do things yourself, learn how to do without and spend wisely. I have seen more than a few businesses not make it past the first year because the owners felt it was important to have staff and office space they couldn’t afford. Only add essential staff, learn how to do the books, handle clerical tasks yourself and don’t spend what you can’t afford. There are plenty of low-cost resources available you can use to build your business. Get Clients Now! by C.J. Hayden, for example, gives you structure and helps you create milestones to measure success in more ways than just monetarily.
- Talk with your financial advisor about tax-saving opportunities available to you in a low-income year. It could be an inexpensive time to make Roth IRA conversions or sell low-basis stock for little-to-no capital gains tax.
Year 2: Build on Success from the First Year
In the second year, businesses typically generate enough revenue to cover expenses, plus a little bit more, though it's still not an extreme influx of cash. That’s normal. In the second year, make sure you’ve got the following covered:
- Stay frugal: Frugality remains a big part of your life during your second year and, by this point, you are probably comfortable doing many things yourself that help keep costs down. If you’ve been subsidizing your business with part-time work of some sort, you’ll still need to do this in the second year, but you can begin to scale it back.
- Get feedback from existing customers or clients: What do they like? What don’t they like? Why did they choose your product or service? Use this information to develop the most cost-effective marketing plan you can. Build on these successes. (For related reading, see: 5 Steps to a Small Business Marketing Plan.)
- Help support those just starting their first year: It keeps you humble.
Year 3: Update Business Plan Based on Financial Success
In the third year, business typically does much better. You now pay yourself a decent wage and you finally feel you can exhale a bit. Priorities now shift:
- Your time begins to be worth more than your money: Take a deep look at all the responsibilities you have. Identify a few outside your passion and your expertise and consider outsourcing them.
- Talk to your financial advisor about setting up a solo 401(k): You need to save for retirement and minimize your tax bill – this solution tackles both effectively.
- Update your business plan: You can start by dusting off the one you created three years ago. Odds are good that business today looks quite different than what you initially envisioned. Invest time in developing a new strategic plan based on what worked and what didn’t, what you enjoy or don’t enjoy. Check in with this plan quarterly and update annually going forward. It's good to always be open to new opportunities, but having a solid foundation and general plan keeps you focused on the goals that matter.
The initial three years of getting a business off the ground are risky, challenging and rewarding. If you survive these three years, you are well on your way to financial independence.
(For more from this author, see: 8 Essential Four-Letter Words for Financial Health.)
This article was originally published on Investopedia.