Mistake #1: Under-capitalization

Money makes the world go round and your business is no different.  Someone, somewhere, came up with the well recited statistic that over half of all small businesses fail within the first two years.  Obviously there are many combinations of factors that play into this, but the amount of capital available when you start a business can directly offset those other factors.

Think about this, if you have enough money at startup to cover all of your monthly expenses for two years straight, then you can beat the odds right off the bat.  No customers? No problem, you are still in business.  Downturn in your market?  No problem, you are still in business.  Now, please raise your hand if you have two years worth of operating expenses available for you business.  That’s what I thought, very few people have that much cash available when they start their own business.  If you do, can I borrow some?

How much capital will you need at the start?  I can’t answer that question exactly because every business is different.   But how much will you need to buy your initial assets, inventory, and lease?  How much will you need to operate your business each month?  You will have to put together a business plan to determine what that number is, but remember one important thing.  DO NOT BE A DREAMER!

When you are putting that plan together and trying to determine the minimum amount of initial capital you need it is time to be realistic and pessimistic, not optimistic (but see Mistake #2).  Think, what if I have no clients the first 4 months?  What if my cost of goods doubles within 3 months?  What if I have a heart attack 2 months after I start the business?  These are just some examples and there are plenty more questions to ask yourself.  Remember, it’s always better to plan for the worst case and have things turn out better than hope for the best and end up in bankruptcy.  When you arrive at a figure, double it.  Just in case.

If you are no sure how to put together a business plan you can see some example business plans at this Small Business Administration Website.   The Small Business Administration also has plenty of other valuable resources when you are putting together your business plan.

Take your business plan to other professionals and get their input or opinion.  Visit a local Small Business Development Center.  Visit an accountant.  Visit an attorney.  Then sit down with your spouse, and get their opinion.  If you know other business owners, get their opinion.  Call vendors and get quotes.  Call the phone company and the internet company, and every other service company you will need and get quotes.   Get as many opinions as you can.  You don’t have to include everyone’s opinion, but the more people you talk to the more likely you will have thought about and analyzed potential problems and the more prepared you will be to make sure your business succeeds.

D. Bryan Willis

D. Bryan Willis

Bryan Willis is a Tyler lawyer providing legal services across Texas in the areas of business law, litigation, probate, and estate planning.
D. Bryan Willis

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