Surviving Your First Three Years as a Small Business Owner

Charles P. Schulz

Charles P. Schulz, AIF®

Entrepreneurs and business owners have a great deal of my respect. There are obvious hurdles to starting your own business, and while some of these are easy – such as identifying your passions and dreaming of success – many are difficult. Finding the capital to start your business, choosing the right legal structure, convincing people to work with you (or invest in your company), and developing a process for delivering goods and services, are some of the tangible challenges faced.

Far and away, what I admire most is the massive leap of faith required. Gone is the steady paycheck; it is traded away for a complete disruption to your daily lifestyle, all with less time, less money, less balance, more stress and anxiety. It’s not for everyone. There’s a great deal of determination and persistence that’s present in all of the business owners I’ve encountered throughout my career, which is one of the reasons why I enjoy working with these individuals so much.

When it comes to finances, there are often unique questions and uncertainties that business owners face. My goal is to educate and work with business owners in approaching financial decisions throughout the various phases of the business lifecycle. Today, we’ll focus on the critical start-up phase of a business – years one through three.

Your Focus for the First Three Years in Business

The first years of a business are filled with excitement and unknowns. Unless you purchase a franchise, there is no manual and, as such, business owners are faced with identifying what the ‘new normal’ looks like. Regardless of how much planning and forecasting may have been done prior to launch day, business owners will largely find themselves in the land of the unknown these first three years, and that’s OK.

  • Your four primary areas of focus during this time should be:
    • Growth … Grow as much as possible, and recognize that not every day-to-day activity adds to the growth of your company. Creating revenue should be paramount. Avoid pursuing perfectionism, as this can become a problem that hinders growth. Learn to live with some things going awry until your business is truly up and running.
    • Your net income statement … monitoring your net income statement will help you determine if you are making money after all business expenses have been paid. You can also use this to determine which areas of your business are over or under budget.
    • Your balance sheet … watch your balance sheet to determine if you are building, or eating into, your equity. Be on debt watch and make sure you understand the difference between good debt (inventory) and bad debt (excessive use of non-deductible credit, etc.).
    • Your cash flow statement … managing your business’s cash flow is key. You need to ensure that there is enough money coming in to cover your expenses, and anticipate future income and expenses. Cash flow statements break down the information from your balance sheet and income statement into simpler data, providing a snapshot of the health of your business.
  • Prioritize your debts. If you can’t pay everyone, order creditors by how essential they are to keeping your business running. Some may be willing to work with you on payment schedules so that you can maintain good standing with those who won’t budge. Your most important debt is your widget; without your inventory or product you cannot create revenue or fulfill your promise to customers, which is everything for the integrity of your business.
  • Depending on your clientele, you may be paid at the point of sale or have accounts payable in monthly or even quarterly timeframes. After you have been tracking your payables for some time, you may begin to establish what the cash flow of your business looks like. In time, you get comfortable with a fluid income stream and how to manage it over longer periods of time. Trends will help you determine when, and in what increments, money should stay in the business and when you can give yourself a ‘paycheck’, so that you always have enough cash on hand. Be prepared to be broke and live as a minimalist; this is a marathon not a sprint.
  • Keeping cash on hand to manage the unknowns that will emerge is great, in theory. In order to accomplish that, retirement savings may be non-existent. These first years require accessible cash, which is not possible in a traditional retirement account like an IRA or 401(k). A rule of thumb I typically share with my clients is to forego investing anything they may need access to within the next 12-18 months. If cash flow is healthy and you have established a comfortable amount of cash on hand, there are options for investing that keep funds accessible without a tax penalty for early withdrawal. The decision to earmark funds for retirement is typically discussed once the business is more mature.
  • Finding capital to finance growth can be a real challenge. Don’t feel defeated if a traditional business loan, SBA loan or line of credit is not accessible in your first years of operation. Over the last few years, online lending such as crowdfunding and non-bank products like merchant cash-advances, community development venture capital, program-related investments offered by grant-making foundations, and other such entities have become increasingly popular.
  • While adding unnecessary expenses hurts cashflow, business insurance is not a place to skimp. No first-time business owner instinctively knows about things like business overhead disability, personal disability, workers comp, general liability and other types of insurance they may need. Identify what types of insurance are needed now, and what will be needed as the company grows. Lack of coverage could result in disaster for the business and its owners, and one need look no further than asking veteran business owners for anecdotal evidence of why this can be such a crucial area.

Your first three years in business are a critical time in which many important decisions, advancements, and mistakes can be made while riding an emotional rollercoaster. Hopefully these considerations are helpful for you as you approach financial decisions. In my next article, I will cover the period beyond year three, and offer advice for this next phase of your business.

Important Disclosures