The first year of any business is the toughest one. Customers need to be cultivated, budgets made, employees hired, and cash flow managed. And that first year goes by faster than anyone ever thought time could fly. There’s a lot to do, not enough time to do it, and if a certain measure of success isn’t reached, the business closes its doors.
It’s not easy to overcome the issues that plague a first year business. Some come in the form of a Catch-22, others are a lack of foresight, and sometime it’s just plain bad luck. Good planning and thinking outside the box are important leadership traits needed to help a business overcome common pitfalls. Following are tips to make it through the first year and into the future.
Develop a Customer Base
There’s a saying of “build it and they will come.” It’s true, to a point. A product that generates buzz brings customers who are eager to buy what’s being offered. But there’s a whole lot more to selling a product than simply relying on an initial surge of demand. Customers need an incentive to return for more, and if customers feel they aren’t important to the company, they’ll go elsewhere or turn to social media to express their displeasure. Loss of the customer base before it’s had a chance to develop is a sure killer of an emerging company.
Court the first wave of customers in a way that makes them feel as if they’re valuable to the company (tip: they are). Give them incentives to buy more product, don’t abuse their gift of contact information, and offer them the opportunity to buy the next product once it’s out of development. Selling an item is more than a simple transaction where money is exchanged for the object. Post-sale customer support, reaching out to gauge satisfaction, and courtesy contact are needed to encourage the customer to return for more product over time. Neglecting any of these elements in the first year does a lot more harm than good.
Develop a Budget
Don’t be like every other startup and burn through cash as soon as it comes in. Instead, create a budget from the get-go and stick to it. When you develop a budget, start by earmarking money for fixed expenses. Rent or mortgage payments, payroll, taxes, utilities, suppliers, and equipment costs all need to be fixed line items in the budget that get paid first. All of these are the nuts and bolts of the business and profits should go towards paying them off.
Resist the urge to look at a positive balance on the sheets as a piggy bank. Learn to ignore the existence of “extra” money and keep it as a reserve for future use. Only tap into it when it comes time to reinvest or pay off an unexpected bill. Fiscal discipline is key to making it out of the first year intact. Taking out profits during this time doesn’t help the business weather a downturn even though it’s tempting to do so.
Dealing With Uncertain Finances
Sometimes it happens that customers fail to pay in a timely manner. Lack of income impacts everything from paying suppliers to making payroll. And finding cash to make up these shortfalls can be difficult. Chances are good that the money to open the doors didn’t come from a bank but from savings or non-bank financing such as a venture fund capitalist. When savings run out or there’s no more money coming from the fund, the typical answer is to turn to the bank. But the bank may not be such a good option due to the fact that a business doesn’t have much of a credit profile in its first year. Banks are conservative by nature and prefer to loan money based on a borrower’s credit history as opposed to future profits.
One way around the bank is to use invoice factoring as a way to generate needed cash. Factoring avoids the credit history issue by underwriting the future of the business and the creditworthiness of customers. The factor advances against a business’s outstanding invoices (usually 80% to 90%) and will send funds to the business immediately. When the customer pays the factor in 30-45 days, and the factor sends the remaining balance to the company less the factor’s fee. Factors aren’t concerned with the credit history of the company. Instead, factors look to the credit quality of the customers which allows the factor to offer lines of credit that can really help a company grow. The credit limit of a factoring line of credit is limited to the amount a company can sell, not their historical financial performance.
Taking Reasonable Risk or Thinking Outside the Box
Inflexibility causes many businesses to go under no matter their size or age. Never hesitate to find a new or creative use for your product, shift with market trends, and find ways to use your workforce and/or equipment to create different products for the market. And never be afraid to take a measured risk that can create a reasonable return. Very few companies succeed by keeping their head down and avoiding risk. They may keep their doors open, but they don’t increase their profitability either.
The goal of being a new business is to succeed beyond anyone’s wildest dream. Sometimes that means taking on risk. Always make sure that the risk won’t impact the business adversely, that it won’t drain money from the core business, and that getting out won’t be problematic. Be smart, be safe, and don’t turn from an opportunity simply because there’s uncertainty involved.
These core elements are what help a business make it through its first year, but they’re just a starting point. Each company needs to develop a distinct culture around its product, stay nimble and responsive, and be willing to go the extra distance to prove itself. There’s a lot more to putting out a product and watching it fly off the real and virtual shelves. Support, customer care, and being more than a faceless operation is needed to get the customer emotionally invested in the company. It’s what makes them come back for more.