As the saying goes: You gotta spend money to make money
Startup costs (the expenses incurred during the process of creating a new business) are important, but you need to know when and where to spend the money. Entrepreneurs often struggle with their budgets; hence they need to be smart when it comes to managing the funds. Careful planning and meticulous accounting are the secrets to the success of a startup. However, startup owners need not be cheapskates whenever they need to spend money.
The difference between a winner and a loser is that the winner spends money only to ensure long-term benefits for the organisation. Some expenses are absolutely important and there is no way you can avoid them. Here we will discuss four essential start-up costs that entrepreneurs must never skip:
1. Invest in a solid business plan
According to Boston Consulting Group’s 2015 report Die Another Day: What leaders Can Do About the Shrinking Life Expectancy of Corporations, almost one-tenth of all public companies fail each year. Investing in a business plan is important since it helps you understand your goals and decide how to achieve them. Without a solid business plan, you will never be able to manage your business effectively.
Take the example of Compaq which was once the world’s largest supplier of PCs. Compaq (founded in 1982) was the first startup that reached the US$100 million mark in its second year of operation. It was also the youngest ever firm to get listed as a Fortune 500 company. However, it all came to an end in 2002, when the company was acquired by Hewlett-Packard. The failure came because the executives failed to align their strategies with the shifting environment.
Hence having a business plan is necessary, but upgrading it regularly is even more important.
Entrepreneurs need to invest in a business plan in order to:
- Map the future
- Ensure growth
- Assess the risks
- Understand the potential expenses and manage cash flow
- Develop a course of action to achieve the business goals
- Support a strategic exit
Having a business plan is crucial if you need to attract investors for your business. A business plan will help the investors understand where you are headed towards and what kind of return they can expect from their investments.
2. Market research
Business market research is a method of accumulating data (from various sources) to determine whether the products/services you offer will satisfy the needs of your potential customers. Because the market is changing constantly, careful research of the industry and the consumers is important before starting a business. Knowing the target market and having a clear vision of the ideal buyer persona is crucial to the success of the business. It is also essential for start-up owners to understand the market needs and how they can meet the needs.
Investing in market research is important since it helps you:
- Understand your existing and potential customers
- Develop marketing strategies
- Minimize risks
- Track problems and find a solution for them
Startup owners can hire market research professionals if their budget allows or they can leverage the various tools that are available in the market. Some of the best market research tools are SurveyMonkey, Open Strategy, MyBestSegments, and a lot more.
3. Get legal advice
An entrepreneur seldom thinks about the legal issues when starting a company. This is one mistake that has led to the sad demise of many companies even before they could mature. Hence, legal counsel is a must for all start-ups. Whether it is about the basic incorporation paperwork or understanding the liabilities, good legal advice right from the very beginning can be very helpful. Moreover, for certain kind of businesses, owners are often required to submit essential documents and business details to health inspections and authorizations in order to get the business licenses and permits.
Entrepreneurs must make sure their organisations are legally secured. Make one mistake and you can be financially devastated. Startups need dedicated legal counselors because:
- Employment laws are very complicated and confusing,
- You need to create contracts and agreements for smooth operation of the business,
- You need to stay away from renting and leasing (of property) hassles,
- You need to secure your assets and intellectual properties,
- You need to make sure your company is compliant with the securities laws.
Entrepreneurs often do not realize they have made a legal mistake until they have to pay for it. Therefore, working with a lawyer is important since he/she would provide advice that is in the best interest of the company.
4. Get an accountant on-board
Considering the number of startups that fail in the very first year and the challenges that entrepreneurs face every day, it is a must that they hire a professional who can keep a close eye on the business finance. Startups should consider the services of an accountant as an investment and not an expense. When running a business, entrepreneurs are often tempted to cut costs; but might be the biggest mistake and result in the downfall of the company.
An accountant helps you with market analysis, income projections, cash flow statements and other financial aspects that are crucial for running your business. Some other ways how an accountant can help you grow your business are:
- You can concentrate on other aspects of your company, while the accountant takes care of the finances.
- Taking care of taxes can be a pain. An accountant takes away the burden from your shoulders.
- Accountants make sure the money goes in the right places so that your business grow rapidly.
- Accountants help you in pitching the investors. They can show the figures, growth projections, and hard data to impress the investors.
Launching a new business can be exciting, but entrepreneurs often get caught up in the excitement and make wrong decisions. While cost cutting may be important for start-ups, some expenses cannot be avoided. Spending money in the right way can ensure long-term success for your company. Hence, entrepreneurs must know when and where to spend money.
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