The failure rate of startup businesses is not news to anyone in the world of entrepreneurship. And it's equally sad to know that if you sift through the carcasses of these dead businesses, you will definitely find startups that were founded on great business ideas.
You may wonder why businesses built on brilliant ideas still fail. The answer is usually fairly simple. Having an idea for a business and having an idea about how to run a business are two entirely different things. The reason most startups fail centers around two things -- management skill and financial skill. A dearth of any of these two can kill your business.
I want to focus on the latter reason, financial skill. Let's say your capital base is robust enough to deal with all your business expenses. If you do not know how to be disciplined and frugal with spending, the amount of money you have in your business’s kitty will not do you any good.
More From Entrepreneur.com
If you are a startup entrepreneur, here are a few tips to help ensure that you maintain your capital base, and enhance your profit margins as soon as possible.
1. Postpone personnel rewards.
Starting and running a business is already a herculean task on its own. Think of how much worse things will be if you start dolling out exorbitant amounts of money on unnecessary employment benefits and expensive salaries. You can avoid depleting your capital by avoiding these practices. Set your employee salaries reasonably and agument it with performance bonuses.
If you must have employee benefits, limit them to only those that are critical to motivating employees to achieving the set goals and objectives. Beyond helping you save money by breaking even and turning profit sooner, this practice will help you develop a culture of frugal and disciplined spending in your business.
2. Keep personal and business finances separate.
You are the founder of your business. This implies that you own the business. The problem comes up when you mistake this to mean that you are the business. No successful business can be run with such a mindset.
Always keep your personal and your business finances separate. Money made from the business is for the purpose of maintaining and growing the business. If you do not separate these two, you will soon find yourself dipping your hands into the business’ coffers for reasons that are only of personal benefit.
It helps to have you on the payroll of the business like every other employee. This ensures that you are making money from your business while also preventing you from depleting business funds.
3. Spend cheap with coupons.
Don't ever buy stuff because you can afford to. Having enough money to make a purchase does not mean that you should make it. Develop the habit of looking around while shopping -- especially online -- to ensure that you get the best possible deal.
One way to spend cheaply is by using coupons. You will be amazed how much you can save. I have always used coupons whenever available for important business purchases. When I purchased the first set of PCs for my ecommerce startup, I was able to save a good amount of money by using the coupon codes I got through Promocodewatch. The fact is, coupon codes have remained one of the main reasons some businesses have been able to start up and stay afloat.
4. Skip the real estate.
You do not need a corner office to run a successful business. Many businesses that are successful today started in awkward locations. Just ask the founders of Google.
Do not spend money on real estate that will not directly benefit the business. You can turn part of your house or any other free space you have into an office. From there, you can run your business with your small band of employees.
Let the business grow and expand organically so that when the time to spend on real estate comes, you will know about it and better still, you will be able to afford it without putting a financial strain on your business.
In essence, drop off whatever won’t be missed if they are taken out. You can start cheap, and scale up later. I started my first six figure ecommerce business on free WordPress themes. I scaled up from there.
5. Purchase key person insurance.
In every business, you will find that there are certain people who are invaluable to its success. One way to protect your business is to purchase key person insurance on such a person. As a business owner, you certainly belong in that category.
Key person insurance is a fancy way to describe life insurance on you, co-founder or key employee on whom the continued successful operation of your business depends. The business is the beneficiary under this policy. This insurance coverage is important because it ensures that if anything should happen to the key person, rendering him/her incapable of working, the business will have other options available to them besides filing for bankruptcy.
Related: Valuation Is Not Just For Startups
The business will be able to use the insurance payoff to cover operating costs and pay off debts until they can find a replacement for the key person.
The ability to adequately align your business with strict budget discipline is critical to its survival. Since finance is the life-wire of most businesses, every startup entrepreneur should focus on how to efficiently manage his/her business budget.