Capital and cash flow are existential entrepreneurial struggles. And efficient operations determine whether a new business is ready to fly.
“If there is no struggle, there is no progress,” said Frederick Douglass in an 1857 speech. While the famed orator and activist referred to the quest for emancipation, these wise words apply to nearly all human endeavors, including starting a business.
Every entrepreneur must learn painful lessons to improve an organization and grow as a leader. Some of these challenges are inevitable. But others are so common that they can be avoided or mitigated by simply learning from others’ mistakes.
In the first installment of this series, I covered the common entrepreneurial challenges of planning the Five Ps of Marketing and hiring the right team. In this piece, I explore two more routine issues. One is a make or break proposition, while the other prevents a new venture from realizing its potential.
Financing trials and tribulations
There are two primary ways new entrepreneurs fund the business. First, some acquire venture capital and build the infrastructure, operations, and something resembling “full” staffing with a great deal of confidence that the business is viable. They keep an excruciatingly close eye on run rate and burn rate, hoping the latter stays at a sustainable pace toward profitability.
The second—and, in my experience, far more common—option is bootstrapping. A combination of savings, loans, and other funding is used to scale the business toward sustainability or at least a minimum viable product (MVP). As the business grows, headcount, structure, and perhaps features or services grow along with it. Some entrepreneurs choose a hybrid model; outside capital may come into play once the MVP is achieved. Regardless, bootstrapping an iterative process. It’s a delicate balancing act that presents a “which comes first—the chicken or the egg?” challenge to new owners.
Each model has its advantages and drawbacks. Venture capital and huge business loans are harder to acquire, and this model carries the risk of quickly burning through cash. This is especially the case with a poorly researched business plan or product.
Bootstrapping may seem like a more cautious approach. But it certainly doesn’t feel that way when our savings and perhaps some family funding are sunk into the venture. This model also carries the risk of failing to have enough resources for the structure we end up needing. Employees may be underpaid and quickly become overworked as sales ramp up, for example, and penny-pinching can make it harder to acquire or keep top talent.
In either scenario, a lot of entrepreneurs run into the same issues: not understanding the financials well enough, choosing the wrong loans or funding structure, and underestimating the actual expenses. I certainly ran into many of these problems.
Financial missteps and conservative vs. rosy planning
When I started Fit2Go, I had visions of a new, modern kitchen that would be the centerpiece of my operation. I did my research and received multiple bids for the work, and the consensus was that it would take six months and cost $150,000.
In truth, it took $300,000 and a year-and-a-half—a massive expense and headache while paying rent and struggling to get the right permits. I had to obtain additional funding from family and friends to complete the project, adding to the pressure. In retrospect, it would have been far easier to purchase or rent an existing kitchen with all of the necessary equipment and permitting.
This was a pretty big mistake. Given the scale, it’s easily something that could have put my new business in the ground. And failing to understand expenses and plan for them correctly is one of the most common missteps that new entrepreneurs make.
Many of us underestimate the correct cost of a lot of things, from inventory to equipment to personnel. Others overestimate their projected cash flow to cover expenses. In any new business, we are well-served by extensive research, conservative planning, and finding creative, lower-cost solutions.
Aside from the expenses side of the equation, one of the Five Ps of Marketing comes into play regarding finances: pricing. Many new entrepreneurs exclusively price a product or service according to costs rather than what the market will bear. This may lead to a rosy outlook on how much people are willing to pay for something, which could result in a non-viable product or service. Others underprice offerings, not realizing that there is a higher demand for the product or greater disposable funds among the target market. The target market also may associate a higher price with a better product. In either case, failing to set the appropriate price will impact cash flow calculations immensely.
Another marketing (promotion) aspect that often disrupts financial planning is discounting. Many of us discount heavily to get our new product into the wild and adopted, especially during testing. But this can go way too far if we don’t have a good understanding of the financials. For example, in a company with a typical 30% gross profit, a 10% discount eats up almost the entire net profit. In this scenario, a business would have to increase revenue by about a third (through volume) to make the non-discounted profit. Unfortunately, volume is often in short supply for brand-new businesses.
There are numerous other examples of financial mistakes that new entrepreneurs make. And I (and many of my peers) made a lot of them. The fundamental issues are that finances—from funding a venture to the decisions that make it profitable—are often more complicated than we realize. And many of us aren’t well-trained or naturally skilled at managing cash flow or projecting it. This can be fatal to a new enterprise, and the only solutions are to figure it while staying conservative and creative—or get some help!
Business operations, execution, and oversight
“Operations” is a broad category, and a tough nut to crack for new entrepreneurs. For many of us, the challenge is like building a plane while flying it. But the common thread that runs through many new operational problems is a lack of actionable information.
Fundamentally, owners have to develop oversight of their business to figure out what works and what doesn’t, and where to place resources. At a basic level, this pertains to managing people. For example, we must devise and implement a meeting rhythm that provides insight and improves communication. Almost everyone in a startup wears multiple hats at different times, and getting a handle on operations requires data!
Effective communication results in:
- Clear responsibilities to avoid working in silos and at cross-purposes
- Collaboration and documentation that develop good processes and avoid redundancies
- A better understanding of challenges and which resources should be applied to meet them
- The ability to define and refine roles, responsibilities, and accountabilities
Direct communication with staff is just the tip of the data-deficit iceberg faced by many new entrepreneurs. In the beginning, many of us don’t have much information beyond sales receipts and a spreadsheet of fixed expenses. The crucial roadblock caused by this is a lack of visibility into problems and opportunities. Fundamentally, we can’t improve what we can’t measure.
Take marketing, for example. Everyone does it, but many of us starting out lack basic data on whether a campaign was effective beyond whether it seemed to generate sales. But a deep dive into something like a social media campaign, for example, provides all kinds of essential metrics, such as how many people saw an ad, how many clicked, how many made it to an order page and abandoned, and precisely who bought. Entrepreneurs who don’t understand these aspects don’t genuinely know what’s working or how to apply their resources effectively.
This is just one example of many, and that level of detail is required in numerous aspects of operations, from overseeing the marketing to hiring to production and distribution processes. Visibility is incredibly valuable. Actionable information drives well-informed decisions and better execution. Unfortunately, few new entrepreneurs have enough of this data or know how to tap it.
Improving operations is the final key to first-phase entrepreneurship
Many startup leaders work out the problems I’ve covered in this series through trial and error. We create a viable product or service and price it right (or well enough). Distribution and marketing efforts get off the ground, and hiring is adequate to good. We develop a pretty good understanding of the market and solid financials. And, eventually, many of us start collecting and analyzing the information that drives smarter decisions. The business becomes stable, and owners look toward the next phase: growth.
But sometimes, we can benefit from hitting the pause button.
Devising effective, efficient operations is the last common challenge that I’ve listed because it’s often the last thing to fix. Many of us get operations in good enough shape to power through to essential stability. Things may only really be running at about 20% efficiency, however.
Think about it. We’ll know pretty quickly whether our product is viable and the business fits the market. We succeed or fail. The same applies to financials and, to some extent, hiring the right people—it’s sink or swim. But operational aspects can keep the business running even when they suffer from significant redundancies and inefficiencies.
This is important because figuring out operations takes time and effort, and it’s often crucial to achieving true profitability. Without acquiring one new customer, spending another dollar on marketing, or hiring anyone else, we can vastly improve net revenue and set ourselves up for the next phase of growth. Improving operations is where we really start to generate profits, just by making things a lot more efficient.
Again, this can take years. This is why improvements to operations overlap the startup phase and the subsequent phases of entrepreneurship, and really take off when we start building a business by design.
Many entrepreneurial growing pains are necessary—but not all of them
Remember, about 20% of new businesses fail in the first year, which jumps to roughly half by year five. Thus, at least half of us painfully solve these and other common problems and push through to a new phase of entrepreneurship. In a sense, that pain is a good thing.
We learn. We grow. And we can apply this knowledge to improve our business and perhaps start another one someday with a lot more wisdom and skill. The struggle also invests us in our enterprises in ways that are hard to describe. It provides a shared experience and a sense of comradery with fellow entrepreneurs.
Nevertheless, some of our mistakes can be mitigated or avoided. And numerous business owners who closed up shop may have survived and gone on to thrive with a little knowledge and better planning.
If you are a brand-new entrepreneur, I encourage you to put your head down and push forward. If you’re someone who has already survived the startup trenches, I congratulate you on making it through the first E-Volution phase. The challenge isn’t over by a long shot, but here is where things really get interesting and, potentially, very cool.
The path forward is where we become better leaders and build a business—and a life—by design.
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