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Starting a Small Business on a Budget

Starting any business, even a small one, requires cash. You need working capital just to operate, for example. And you may need additional funds for fixtures, equipment and machinery.

Not surprisingly, then, finding this startup cash becomes a major challenge to beginning operations. But you can use several tricks to make starting a business on a budget easier.

Starting a Business on a Budget Trick #1: Pick a Service Business

The economy is full of interesting business opportunities. Some require more capital than others. Accordingly, one of the easiest and most powerful tricks you can use to start a business on a budget is picking an opportunity with low capital requirements.

For example, if you start a professional service business like a consultancy or a personal service business like a catering firm, your capital requirements end up way, way lower than someone who starts a manufacturing business that requires million dollar pieces of machinery.

Accordingly, look at service business opportunities if you're short on cash.

Starting a Business on a Budget Trick #2: Start Really Small

If you can start your new business so that, in the beginning, the operation is very small, you'll also reduce your capital requirements.

Almost automatically, smaller operations require less cash and inventory. And smaller operations may operate just fine with more modest investments in fixtures and equipment.

People sometimes don't like to start small. But oftentimes, these people miss the fact that with steady growth, even a very small operation quickly grows larger over time. For example, a $25,000-a-year service business growing by 25% a year, doubles in size every three years.

Starting a Business on a Budget Trick #3: Operate Part-time in the Beginning

Another point related to the suggestion of starting really small: You may want to operate the business on a part-time basis, at least in the beginning. Here's why: Operating your new business on a part-time basis may mean that the business doesn't need to support you. You'll then be able to re-invest the profits back into the business.

Nobody wants to work two jobs, obviously. But if you can juggle your schedule enough over the first six or twelve months to both do your regular job and to operate your new business, you may find that you've largely solved the cash flow problems that threaten many new small businesses.

Starting a Business on a Budget Trick #4: Grow Slow

Here's a financial reality that surprises many business owners. Not only does starting a business require capital. But growing a business requires capital, too.

In other words, say you've got a good little operation going--one that makes you a decent living. But say you really want to double the size of the business. As a general rule, in this situation, if you want to double the size of the operation, you need to double the capital you've invested.

Suppose you've invested fifty thousand dollars into the operation, for example, considering both the money you originally invested and the profits you've reinvested. To double the size of the operation, you probably need to double-down your investment to one hundred thousand dollars.

How does this financial reality relate to starting a business on a budget? Because growing a business means growing the capital invested in the business, typically you want to grow a business slowly.

Starting a Business on a Budget Trick #5: Stay Lean and Mean

One final trick, or maybe suggestion is a better description: You want to stay lean and mean throughout the first months of operation and even after your new operation seems to have stabilized and cash flows seem predictable and steady.

Regularly, business owners start out lean. And then, when the operation grows to a stage of healthy profitability, they become slightly careless about cash flows. Perhaps a bit undisciplined in managing their working capital.

But part of the business owner's job--one of the keys to profitability--is keeping a lid on costs and working capital. simple and time-worn: Rather than have the S corporation borrow the money and then have the shareholder-employee guarantee the loan (the usual arrangement), your tax accountant will want the bank to loan the money to the shareholders (who in turn re-loan the money to the corporation). If necessary, the S corporation can provide a loan guarantee. This arrangement, called a back-to-back loan, does create basis.

About the author:

About the author:

CPA Stephen L. Nelson is the author of Maximizing Employee Retention Credits.