Start your business the lean way to be successful

Spending all your cash to start a business is the fastest route to failure.

Nearly every day Michigan State University Extension gets a phone call from somebody who wants to start a business. Most of the time, these callers are looking for a grant to start their business. But every once and a while, there is an entrepreneur who saved up some money to start a business, and now they are ready to open their new business.

When you have cash resources available to start your business, you should think twice about spending it all to open your business. Doing some research on this topic I came across a quote from Mic Heynekamp from Socorro Springs Restaurant & Brewery in New Mexico and Colorado. He stated the following:   If you spend lots of money to get started, you are that much closer to failure. If you can do it really lean, your risk is much lower.” (Read more here: 20 secrets to career success for budding entrepreneurs).

Lean startup is preferred for many reasons. When you start lean, you learn to manage for lean throughout your business life. You will not spend money on items that do not directly translate to sales and profit. You will not take on inventory that might be nice to have, but has a slow turnover. You will not purchase raw materials until you have a hard order. These are lean management tools that you will acquire immediately upon a lean start-up.

Sometimes, entrepreneurs are fully-funded to start their business. This is great! But, if you spend all of your capital on equipment, fixtures, and inventory, you no longer have working capital. Most startups need to have a good blend of equity and debt financing to have a successful business. Many times when entrepreneurs can be fully self-funded, they are debt averse. This management style is great for an existing business, but for a start-up, you should consider all financing options available.

Your accountant and tax advisor can provide better, business-specific, tax and profit implications for your particular blend of financing. The long and short of it goes like this: Each new business requires a specific blend of equity and debt financing to be both profitable and to limit tax implications. Only you and your tax advisor can make this determination. But, if you spend all of your cash to start the business, you’ll have nothing left to operate the business, and this could lead to an untimely demise.

Now go out there a start something. Just do it lean.

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