Three Strategies for Preserving Start-up Capital

The Small Business Administration says the second most common reason new businesses fail is a lack of sufficient capital to sustain the business until it becomes cash-flow positive. (The most common reason for failure is lack of front-end planning.) On average, successful businesses become cash-flow positive around the middle of the second year of operation. Start-up capital must last that long. Three strategies can help start-up money go further.

Strategy #1
Buy your secondary equipment in the secondary (used) market. There is essential equipment that a business cannot survive without, such as a working camera for a photography business. Consider buying such essential equipment new. However, spend less for supporting items such as lenses, costumes, props and screens by buying them in a secondary market. Making start-up money last by spending less on equipment could also provide a competitive cost advantage.

Be creative and determined when locating a secondary market; it's time and effort well spent. Here are some starter ideas. Search EBay. Read industry Web sites. Visit area bankers; they may have repossessed equipment or know a fellow banker who has. Find an industry trade magazine with classified ads. Call manufacturers about discounted demonstration or repossessed units. Visit competitors outside your trade area (inside it if you're brave). They might have upgraded a piece of equipment and need to sell the old one. In all cases try to negotiate a warranty and return policy.

Strategy #2
Use the economic law of diminishing returns to your advantage. Most industries have a variety of equipment available across a range of costs and performance quality. Usually it does not take much extra money to get a significantly better unit than the cheapest one available. However, there comes a point where gaining small amounts of additional performance (or quality) only comes with a steep additional cost. Consider equipment priced at or just below that point, it's where you get the "most bang for your buck." Using a clothing analogy, store-brand jeans cost about $15. Levi's jeans cost about $40 and Italian designer jeans cost about $150. I'll wear Levi's.

Strategy #3
If your building only needs makeup, don't give it plastic surgery. Have you seen TV shows where designers give a room a completely new look for about $1,000? Let them provide inspiration. There are at least three reasons for minimizing upfront spending on a building. First, once spent that money is gone…you can't access it later for operating the business. Second, you're just starting a business. As you gain experience you may determine that your original remodeling plan wasn't optimized after all. Third, unless you're a landlord, your building is not making you money. Prioritize spending for things that will actually earn money.

When you're in business for yourself, remember that it's your money. Spend it like it's your money. And try to save some start-up capital for a rainy day. There's always a rainy day (or rainy season) coming.

Authored by: Russell Humphrey, Southeast Missouri State University SBDC Counselor, Cape Girardeau
Updated 6/9/08

This story was featured in the June 2008 newsletter