By Brenda Weathers Hargroves
I once began a business with $12,000 outstanding debt in addition to my start-up expenses. An arrangement was made with the creditor to pay off the debt in installments of $500 a month for two years. With careful planning and sacrifice, I was able to meet this commitment as well as grow my business at the same time.
My situation was a worst-case scenario, but my point is you should have some capital set aside for start-up expenses. For example, let’s say that you have $2,500 to invest in your business. Calculate upcoming major expense items and allocate a certain amount for each one. Think of that item as having its own line account. I am a fan of the envelope method. Place funds for each anticipated expense in a specific envelope. Plan to use these funds for the designated purpose only. The amount may not be enough to cover the full cost, but it’s a start. You must then determine how to raise the rest of the required amount.
Perhaps, a major start-up expense is a piece of equipment that costs $3,000. You have set aside $1,000 for this outlay in your calculations. So, what are possible ways to acquire this item? Maybe you can purchase the equipment with a $1,000 deposit and work out a payment plan. Or you can possibly negotiate a lease agreement. The goal is to initially not spend more than you have set aside, with the plan to repay the balance of this debt from future income.
As your allocation of initial funds for expenditures method becomes more sophisticated, begin to add accounts. Start envelopes for major future expenses. As the business makes money, add incremental amounts to the envelopes. Slowly, you will approach having saved the full amount needed to cover those expenses. Continue to tackle upcoming costs in this manner.
When the business receives income, it must be allocated to your outstanding expenses. Add to those envelopes and do not renege on these allocations. This is where discipline comes into play. When you put money into a future expense envelope, those funds become dedicated to that item. You’ve become your own banker by setting up individual savings accounts for each expense.
You’re now also in the position of taking on a bank’s function of lending money. That’s right! You can be your own bank (BYOB). If you are saving for a large future upcoming expense, you can borrow from that account to cover a more immediate expense. Because you are borrowing from yourself, you save the added expense of finance fees or interest. The key is to maintain the discipline to return borrowed funds to their designated purpose.
On the other side of the coin, you must develop and stick to a strict payment plan for all outstanding debt. This applies to both paying off creditors as well as replacing money borrowed from an envelope. When you systematically work at it, debt will eventually disappear.
Business start-up doesn’t always require a large initial investment. Careful and creative management of currently available funds can go a long way towards providing needed capital. Work towards becoming your own banker in situations where you are financing your business with little initial cash. A financially disciplined person possesses the potential to become a successful entrepreneur. The secret is to control your debt, not let it control you.
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