When you first start out you will need to have funds set aside to keep your business running while its in the startup phase.
Advice is plentiful regarding how much you should have – we had enough to keep going for 6 months with an emergency reserve (called a credit card) if things got tough.
I think the top priority for a business just starting out is to reach ‘critical mass’ with the cash-flow. What I mean by ‘critical mass’ is that you want to be in a position where your current customers pay you enough to run your business without any external funds being required to ‘top up’ such as an overdraft facility or loans. Of course you have to factor in natural attrition with your customers but on the whole your current customers should pay all the bills and leave you will some profit.
This should be your core focus and you must be in survival mode at this stage.
Do not fall into the trap of being overly positive about your business succeeding and taking on far too much risk. We knew of one small business that took on too many people initially because the owner thought that once he opened his doors his business would be swamped with work. That did not happen but he still needed to pay staff and pay the leasing bills for the equipment his staff needed such as desk, chair, computer etc…
Think of yourself on a deserted island with only limited resources and no chance of getting anymore supplies – you must make do with what you have and only after great consideration should you spend more money. One of our directors has an excellent approach to spending – she will only spend money if $1 dollar spent brings in $3 dollars of revenue. Anyone in the business seeking budget must prove to her that this will occur.
Once you reach ‘critical mass’ and have profit then you have a solid foundation to take on calculated risk but take it easy! Don’t rush out after you start making profit and upgrade all your staffs computers. You need to be sure that you are at ‘critical mass’ – for example make sure that you are not in the position where 90% of your revenue comes from 1 or 2 customers – if they leave then your back to survival mode.