This post is about the simple process of business startup — spending money to make money.
Some say it is possible to make money without spending any money, and frankly I don’t believe that’s possible. You will either spend time or money to get a business going, and most folks will tell you time is money.
Just to humor those who want to run a business with no startup costs, there’s your chart on the left. (Click the charts for bigger images and slideshow.) You start with no money, and gradually, little by little, over a long period of time, you begin to make some money, and then a little more, and a little more. You could probably accomplish the same thing by emptying your pocket change into a jar every week and saving it.
A more typical business plan is to budget some set amount to spend on the initial startup cost, try to maintain that budget steadily, and achieve some reasonable profit within a projected amount of time. Once you reach profitability, your business expenses are being paid from the income generated.
It is reasonable to think that the more money you can put into the start of a business, the sooner you will reach profitability, and the greater your ongoing profit will be. Projecting those two elements — time to profitability, and rate of income — are part of the challenge of starting and running a business. (And also part of the excitement and adventure!) But a greater rate of spending at startup requires a bigger chunk of money to begin with.
You may, as a new business owner, go to a lender, present a business plan, and borrow a portion of that money, based on your projections of a reasonable time to profit and a generous rate of income following. But let’s keep this simple and say you’re going to start this business with your own savings. So you estimate how much you’ll spend each month, and you budget accordingly. Then you start spending the money and your business is off to the races.
These next charts show the expense/income lines combined into net cash flow. At business startup money is going out; as the timeline progresses more and more money is coming in, and eventually income matches expense and you’ve reached profitability. After that your business is earning more than it is spending. You can start paying yourself a salary from the business, and the earnings can begin to fund further expenditures in the future.
If fortune shines on you (and you have some business savvy) your business develops nicely, you reach profitability sooner than expected, and the income your initial investment has generated is heading skyward. Nice job, way to go!
But perhaps your business hits a few bumps along the road to profitability. Maybe some unforeseen expenses, additional fees, wages, taxes, etc. These added costs push the time-to-profit further out. Or maybe you discover the business is not as lucrative as you first imagined, and the profit is slower to grow. Ok, that happens, no need to beat yourself up about it, and eventually you reach profitability and everything is gravy.
The last possibility is one no business person wishes to contemplate, but it happens often enough… You set your spending with the expectation of reaching profitability within a reasonable amount of time, with a reasonable amount of return. Everything looks good, maybe you can even see the curve turning up ahead, but you run out of money before reaching that profit point. Once you’re out of money it’s like someone pulled the handbrake on your business. You’ve just crashed and burned. A lot of money spent, and very little to show for it.
I hope that never happens to you! Whether you start with $1,000 or $4,000 or $50,000 of your own money, I hope you turn a profit well before the money is gone, and that the income keeps growing more and more over time. Best of success to you!
Want more from Tame Bear?
Fill out the form below to subscribe to the Tame Bear Weblog and we’ll drop you a line when new articles are up. We send updates two or three times per month.
If you like this article, SHARE IT on Twitter, Facebook, Digg, and more.