The way you spend your money at the outset of your entrepreneurial journey tells how sustainable your business will be like in the long-term. The rule is to, initially, spend less than you make. Making it can be achieved either through sustaining yourself or asking others to sustain you. The only way to sustain yourself is to undertake the hard way: to make sales and bring money in. Every sale you make, even trivial, is a small win. Making money feels like winning. In so doing, you are using money as a tool that helps you deliver more value into the marketplace.
The other way to make money is to look for others to fund you. You opt for choosing short-term relief at the expense of the long-term gains. Your objective here is to raise money not to make it. And here lies the difference: between making and raising. When you work on making it yourself, you are actually winning and having control over your business. When you raise it, and get it, you feel like winning. You start spending more than you make, depending on the external funding. You are actually operating at a loss till actual sales come in.
Managing money is what makes or breaks your business, especially at the beginning. When Venture Capital database CB Insights investigated the primary reasons behind the failure of startups, they found out 20 primary reasons. The first reason, which presides over the list, is the product-market fit, by 42%. The second primary reason, by a percentage of 29%, is: “Running out of cash.” Even worse, when CB Insights tracked more than 1,000 startups that raised seed rounds in 2009 and 2010, they found that by the end of 2015, less than half secured a second round of funding. Just 22 percent achieved a sale and only 1 percent reached a value of $1 billion.
To manage your finances you must maximize your revenues along with minimizing your expenses. To maximize revenues, ditch the idea of concentrating on one major sale or large influx in cash but rather act on recurring and consistent sales. The aim is to create momentum that gives you confidence to increase revenues and reinvest in the business. Be more concerned about your mission. What is the benefit customers will get when exchanging their hard-earned money with the value offered? Why it is that one brand makes more revenues compared to a competing one? The difference is in either choosing the value, or making it or communicating it or the three altogether.
Minimizing costs need internal communication with the team involved. The founder of the startup must communicate, internally, the long-term effects of not managing expenses properly. Communicating the vision with the team holds them accountable for the sustainability of the business. Educating them on how minimizing costs and maximizing sales make profits that help the business develop a better product and make a better investment in the staff later. It must be understood, however, that failure to achieve this won’t just affect the founder and employees but also the customers who pay the price when the startup runs out of cash and collapses.
Managing and allocating money judiciously at the early stages of running a business is what keeps it sustainable in the long-run. Paying attention to how money should be gained and spent is the founder’s prime job. Next, this job must be communicated to the team in order for everyone to be accountable of the results.