One of the things that we believe to be true for almost all types of business we work with is the fact that a business costs an entrepreneur twice as much as you think and requires twice as the goal is to make that business profitable.
The tests are linked to the various business plans we look at when we work with customers or when we consider an informal investment; this is what happened to us too, since at the beginning we expected to have enough customers to cover the expenses of our business and pay us a salary in a few months …
… when in reality it took about two years to see earnings.
This type of experience made us think about the different types of cash flow, in fact we have identified five phases that businesses tend to go through as they grow.
Step 1 # Invest in personal money activity
If you launch a business from scratch, this phase is usually the one you are leaving, as you are not taking money out of your business, but you are investing your personal capital in the business in order to pay all expenses, make sales and etc.
Among other things, as far as we are concerned, given that our business was not capital-intensive, we also had to invest in marketing and some in computer equipment.
So we decided to make a personal loan on our business to cover these expenses, not to mention the fact that we already had to pay our mortgage and other bills; in this period, therefore, we lived without savings.
Step 2 # Business not yet self-sufficient, not yet ready
After several months, more than we imagined, we came to the point where our business was working enough to support itself, but not to cover our personal expenses, in fact we were still paying for them with our savings. Therefore, even if you consider yourself independent, economically speaking, you will have to go through this phase as quickly as possible.
Staying here too long may exhaust your resources! Some entrepreneurs replace this phase by working part-time or full-time in another job while setting up their own business. This strategy can help you pay the loan, but it could make you stay with one foot in two brackets: at some point you will have to choose.
Step 3 # Business brings some money, but the entrepreneur continues to pay expenses with savings
After several months, our business made enough money not only to pay our bills, but also to pay for something on our own, yet we still could not get a salary for us. Among other things we had to make sure that that activity repaid the loan we had taken to do it!
In this case you can apply a reasonable interest rate to the business, even if we advise you to always monitor the situation with your accountant when you start taking the first loans and determine the first repayments.
At this point, you will have to add a supplement to your earnings with the money you deducted from your savings, which is fine, but you will not be “out of danger” yet: sustainability and nights spent sleeping will not arrive before the next phase.
Step 4 # The business and personal expenses are paid out of the cash flow by the activity itself
When we finally got a salary thanks to the activity, we celebrated with a stellar dinner! This is because the times were longer than we expected, but then we realized we could overcome all the difficulties. When you reach this stage, you did it – or almost. Your business now earns enough money to allow you to pay your bills and support your lifestyle.
However, if you stop at this point, although you can also sell your business, you are not yet at the point where you create wealth, so retirement will still be a dream! Therefore you will have to move on to the next step to make sure that you generate cash flow that will exceed your expenses.
Step 5 # The investment
This is the ultimate goal: you want your business to earn enough money to maintain your lifestyle and you want it to create wealth for you. Naturally, you have invested in your business right from the start and now you have discrete funds and you can choose where to put them.
You can choose to reinvest the money to grow your business and, in many cases, this would also be the best choice. Alternatively you can choose to diversify your investments and buy or start another business, or invest in a stock market or real estate … the options are almost endless.
These are the five steps that entrepreneurs tend to follow in the course of their growth – and ours! The time that will take to your company to move from one phase to another depends on itself, the economy and many other variables. In the case of our business, it took three years before we reached stage 5 of cash flow and unfortunately, most businesses do not go beyond 4 and rarely reach the fifth.
It is also possible to take a step back, for example you may have been bogged down in phase 4 for years, but if conditions change you may find yourself withdrawing your savings again. The most important thing is to understand the five steps explained above to have a clear plan to follow to reach each step.
Make sure you have enough resources to get through the first phase when your cash flow is negative; finally, we can only tell you that our experience is that launching a business requires twice the cost of what you can imagine, so try to understand if your savings will be able to cover all these expenses.