Saving money and generating capital to start a business is tough and we've all heard stories about famous entrepreneurs working out of their bedrooms and barely scraping by when they were just getting started.
That's why being frugal and spending money prudently from the outset makes considerable sense for the following reasons:
Rational spending inculcates a culture of disciplined thrift and investment. Examining each expense to ensure the greatest possible value for each dollar maximizes and justifies your entrepreneurial capital.
Few companies are able to rely exclusively on internally generated funds (revenues and/or profits alone) during the initial stages to build a base for sustainable long-term growth. Investment in the form of loans or equity is invariably required, a process that inevitably dilutes the founder's ownership and control.
Extending the period between start-up and the need for additional capital infusions to later stages of the growth curve tends to expand the pool of competing entities which may invest, and is generally reflected in a lower cost of capital, either in the form of lower interest rates or higher entrepreneurial retained equity.
Delaying the need for outside capital until proof of concept, quantification of potential revenues, and/or achieving some level of profitability improves your negotiating position with potential investors. Simply stated, reducing expense maximizes cash flow, which reduces the level of revenues necessary to achieve break even, and increases profits.
Founders of companies that survive the start-up phase are likely to find their roles, authority, and return reduced as control of their companies is transferred to those who subsequently finance later stages of the company's growth. The reality is that postponing the need for outside capital until strategically necessary is always good advice.
With that said, let's take a look at five simple money saving ideas for first time entrepreneurs.
1. Postpone Personal Rewards
Starting and owning your own company can be a heady experience, particularly if you have a little early success. Unfortunately, many entrepreneurs are too quick to reap the benefits of ownership, burdening the company with excessive salaries, avoidable and expensive employee benefits, and the trappings of success not yet achieved.
You can conserve your initial capital and save money by doing the following:
Set your salary as low as possible, coupled with performance bonuses
Limit employee benefits to those legally or competitively necessary and no more
Utilize functional, not extravagant, work spaces
Travel and entertain as if you were personally paying the bills, not the company
Reducing your cash outflow and expense burden on the company maintains your capital base, reduces the break-even point of profitability, and sets an example of frugality and discipline for the organization as a whole, which is important in the early years.
2. Focus on Critical Tasks
According to venture capitalist and author of "Hearts, Smarts, Guts & Luck" Tony Tjan, almost two-thirds of entrepreneurs are driven by a vision and an unshakable sense of purpose. They have passion and a "natural storytelling capability".
However, entrepreneurs often overlook details and lack the focus necessary to take an idea to fruition.
If your skill is "selling the dream" - an ability critical for raising money and inspiring employees - rather than fact-driven pragmatism and rationality, you need to be wary of attempting to do too much too soon.
Do not use your company's limited cash and resources to pursue attractive but non-critical paths to long-term goals at the expense of realizing immediate objectives and sustainable success.
Smart entrepreneurs realize that they cannot be all things to all people, and instead focus exclusively on the task immediately in front of them.
Focus allows you to move from one completed task to the next, getting your product or service to the market as soon as possible, while keeping your nonessential costs low using contract labor and virtual offices.
It allows you to be nimble, adjusting to the twists and turns of a fickle customer base, intransigent suppliers, or inefficient, expensive processes and procedures. Focus means you spend only the money necessary to achieve your immediate objectives - no more, no less.
3. Hire Only Critical Capabilities
Start-up companies necessarily rely upon a few key individuals with critical skills to build the company and direct it to higher levels of success.
Realistically, few companies, including start-ups, have every position filled with outstanding, responsible employees at the top of their games.
As an entrepreneur, you should understand which skills are important in each stage of your company's growth, relying upon your own talents where they fit, while hiring and compensating other key employees as you need them.
Key positions you are likely to need at various stages of growth include:
The Revenue Generator
The ability to generate revenues is far and away the most important capability needed in every company, small or large, whether providing services or products. As long as you have sales (revenues), you have cash flow and the time and resources to fix other problems when they arise.
"Rainmakers" - individuals who can design and implement effective marketing and sales strategies, particularly with electronic media - are critical to every company. If this is a skill you don't possess, recruit and hire the most successful marketing/salesperson you can find, and don't shirk on performance-based compensation to get the best. As revenues appear and grow, other operating problems become more manageable.
The Bean Counter
Since accurate financial records are necessary from day one, many entrepreneurs mistakenly seek an accountant, usually a CPA, as one of their first employees. While accounting is critical, the skill is readily available in the marketplace through outsourcing or consulting arrangements.
For example, it is much cheaper to retain a CPA to initially set up the books and accounting software, perform necessary training, and provide regular review, while using lower-paid clerks and bookkeepers for day-to-day record-keeping than to employ full-time, credentialed accountants.
The Money Man
Unlike accountants, individuals who understand the mechanics and practices of lenders and investors, maintain close contacts with sources of capital, recognize the legal and moral obligations required when seeking loans or investments, and have a history of delivering results are relatively rare and usually expensive.
While such services can be provided through consulting or commission arrangements, the need for investor capital is so critical for start-up companies that full-time employment of a competent financial professional is usually justified.
Virtually every product or service has multiple sources of supply so that a first-time entrepreneur can elect to either make the product (or supply the service with his or her own employees), or purchase the product or service from a vendor.
Investing in redundant capacity for a factor that is not integral to the success of your company in the marketplace is generally unwise. For example, a company selling a new wind-proof umbrella would be better advised to spend on design, marketing, and sales capability rather than a new manufacturing facility, since contract manufacturers are abundant. The skill to analyze products and services to determine whether internal or external sourcing is best from a cost and competitive perspective is critical for most start-up companies.
The above list is not inclusive of employees with key capabilities who are likely to be needed during the first stages of growth, nor is it intended to deprecate the value of the entrepreneur.
Companies ultimately succeed by the combined efforts of a team focused on attainable, measurable objectives. Start-up companies, however, rarely have the luxury or the need to hire and compensate exceptional full-time performers for every capability. It is important to understand which capabilities are essential, when they are necessary, and whether the need is permanent and proprietary.
Hiring the right people at the right time is the most effective way to save money long-term. In addition, compensation policies and practices should make strategic sense, rewarding those employees most critical to the success of the company at industry-leading levels, while paying those with essential but non-critical skills and responsibilities at industry averages.
4. Don't Reinvent the Wheel
Charles Duell, commissioner of the U.S. Patent Office in 1899, reputedly said, "Everything that can be invented, has already been invented." While Mr. Duell was obviously mistaken, a first-time entrepreneur should recognize that a whole lot of ideas have been invented, tested, and proven effective.
Thomas Edison said that he didn't want to invent anything that wouldn't sell - advice every manager should follow. Before incurring the expense of doing something originally, you should investigate to see what is available in the marketplace for lower costs than you might incur for a custom solution.
Incorporation papers and legal forms of all types are common across the Internet and third-party manufacturers supply volumes of products ranging from processed food to apparel for a negotiated price, while logistics companies pick up and ship products around the globe.
Computers and communications allow virtual offices with salesmen, customer service representatives, clerks, lawyers, and other administrative services instantly available 24/7. Even marketing and sales can be performed externally by specialized "hired guns" with unique expertise and contacts.
Examine your operations to be sure that the activities you perform are essential and are being performed at a lower cost than you might pay elsewhere. Activities critical to your success should be performed by your employees, primarily for control and to ensure that your competitive edge is sustained, while non-essential services are purchased at the lowest price.
5. Share the Wealth
"You get what you reward," according to Dr. Bob Nelson, motivational consultant and professor at the Rady School of Management at the University of California in San Diego.
Meaningful incremental compensation, whether cash bonuses, stock and options, or tangible financial benefits, are powerful motivators when tied to defined performance goals.
Commission salespeople have been paid upon results for years, while gain-sharing plans have been in use for more than a half-century. Rewarding performance for goal achievement measured by such outputs as milestones achieved, deadlines met, productivity, cost savings, and other tangible measures encourages positive results, particularly when the targets are easily defined, understood, and the responsible employees and contractors have the skills to deliver the goods.
Entrepreneurs should pay for performance, not presence, rewarding those who consistently meet defined targets of performance while replacing those - employees, contract laborers, or consultants - who fail to deliver.
However, before implementing a performance-based incentive, you must be sure you understand and define the appropriate goals, recognizing the possibility of unintended consequences when targets are set without careful analysis and controls.
For example, in the early 1990's, Sears set sales goals with appropriate rewards of $147 per hour for its auto repair staff, and subsequently endured widespread consumer and regulatory complaints when employees overcharged and billed for unnecessary work.
In other words, if you incentive performance, make sure it's not at the expense of customer experience.
Birthing and guiding a company to sustainability is one of the more difficult tasks an entrepreneur can undertake.
More than one in five new companies fail in their first year and, according to Scott Shane, professor of entrepreneurial studies at Case Western Reserve University, "The typical new business started in the United States is no longer in operation five years after being founded."
While implementing the suggestions above won't guarantee success, they will improve your odds and ensure that you get maximum benefit from your initial funding.
What additional tips can you suggest for new entrepreneurs to save money?
About the Author: Michael Lewis is a former business executive and contributor for Money Crashers Personal Finance where he writes about small business, entrepreneurship, and the economy.