10 Lessons for Every "Shoestring" Entrepreneur

By Isabel M. Isidro
Posted Saturday, December 18, 2004

Starting a business requires adequate capital. However, many entrepreneurs are finding that capital alone is not a guarantee for success. Some businesses start out with millions in the coffers, yet end up in the dumps. While a few businesses with shoestring budgets eventually grow to become extraordinary successes.

How can this be? Success in entrepreneurship is not necessarily a contest of having the fattest wallets. Rather, it is an exercise of smart financial management, careful strategic planning, and yes, lots of luck. Successful entrepreneurs know how to stretch and maximize every single dollar.

Here are ten ways entrepreneurs on a tight budget can still come out a winner:

1. Set realistic goals. The first step every start-up entrepreneur must do is to determine the right scope and size of your business. Many entrepreneurs simply jump into the idea of starting a business, without understanding what the business really entails - financial requirements, management know-how, and technological skills, human resource requirements. They eventually fall short of what they can really do. Review the business you have in mind and determine if it is within a range that's both attainable and desirable.

2. Plan your costs properly. A lot of entrepreneurs start a business without the faintest idea of what the costs will be. They either overestimate the cost, or worse, underestimate the financial requirements needed to properly capitalize the business. This is particularly evident in the preparation of financial projections in the business plan. Some entrepreneurs prepare financial projections with numbers that don't square with other sections of the business plan (e.g. marketing section calls for local television advertising yet budget is only $200). Some do not even include a list of assumptions to explain their numbers. From out of the blue, they feel that their business can grow from 20% in the first year to 40% in the second year, without explaining how the increased growth can be achieved.

3. Smart financing for your business. Financing a small business is not a lock-stock-and-barrel proposition. For many entrepreneurs, there is no single source to finance their entire operation. The money provided by one source (e.g. your mom) may be enough to buy your raw materials, but you still need money for your working capital. Entrepreneurs need to look at financing as the sum of the parts of their business: what you finance are the individual assets needed for your business. Your question should always be: "What's the best way to finance this asset using the least upfront dollars?" The ideal financing source is one that provides the longest payback period, carry the lowest interest rates, require little or no collateral and demand no personal liability. Alas, that may be fairy tale. The next best thing is to choose what makes the best sense for you and your business, given your priorities

4. Put your money where it will bear fruit. Shoestring entrepreneurs have one common characteristic: they lack money and often struggle to raise capital for their businesses. Capital of a start-up venture goes to either of these investments: "fixed assets" (furniture, fixtures, and equipment), or "working assets" (inventory and working capital). Despite the lack of capital, many small business owners put most of their money to buying fancy equipment and chic office space - costs that a struggling start-up can do without. This is a common error in business decision-making. Successful business owners put as much money as possible into the working assets - which bears cash and sales - and as little as possible into fixed assets.

5. Is it the right time? Timing can be a key to the success of a start-up. There's a right time and a wrong time to open a business, especially if your business is cyclical in nature or in a seasonal location. The opening of a retail slot in your favorite mall, or your own convenience should not be your reasons for starting a business. Rather, you should plan through the months when the crest for the demand of your product cyclically ends.

6. Control the cash. Cash flow is said to be the lifeblood of a small business. And rightly so. Your business will survive only as long as it has the cash to pay for your financial obligations. With limited capital, cash flow controls every decision in shoestring enterprise, and it can be the only way to navigate during your start-up phase. One key rule for entrepreneurs: only when you have adequate cash can you even begin to think of profits. Many businesses fail not because they are undercapitalized, but because they fail to properly plan the undercapitalized operation.

7. Push the sales. Building sales depend on several factors - nature of the business, location, level or competition, and intensity of marketing and promotion. The goal of every shoestring entrepreneur must be to build up sales immediately. If you have a bank loan or financed your business through credit card, for example, your creditors will not allow you to delay your payments just because you are still in the process of building up your sales. They want your payment - now! You therefore need to push the marketing of your business, maybe issue a flyer this week, run a one-paragraph ad in the local newspaper the next, send out news briefs and article contributions. The key rule is to dedicate at least two hours of your day to marketing your business. Know the steps you'll take before you open and after you open to maximize sales and help the business to fast sales increases.

8. Balance your sales and profit objectives. Sales and profit do not always go together. Some entrepreneurs are willing to cut down their profits in their effort to drive sales up. Oftentimes volume alone will not be able to compensate for the loss in profits. Try to maintain gross profits at least equal to the industry averages. Strive to give the business the best balance between a solid policy of capturing sales without sacrificing needed profit margins.

9. Be 'lean and mean'.A struggling start-up does not need dead weights. Keep your fixed costs down, and spend only on items that can sufficiently contribute to improving the bottom line. If you can still adequately operate from your home office, there is little need in leasing an office space in the downtown area. Avoid hiring a permanent employee if you can still make do with temporary and seasonal staffs Every dollar in expense should be directly tied to income: spend a nickel only when you are sure you can get a dime in return.

10. Master the financial tools. As a business owner, you are responsible for the life and growth of your business. This entails knowing, not only the marketing or production aspects of your business, but the financial tools you need to manage your business effectively. Understanding the finances of your business will give you control over its direction. Unpalatable it may be to some entrepreneurs, knowing the money part of your business will tell you where you've been, where you're going, and how fast you're getting there. Sure, you can hire bookkeepers and accountants. But you yourself need to understand your cash flow, income, profit and loss statements, and break-even point.

About the Author
Isabel Isidro is the Managing Editor of PowerHomeBiz.com. For information on starting a small and home-based business, visit PowerHomeBiz.com at (http://www.powerhomebiz.com)