Thanks for the nice comment about the article. I agree, might make good sense to have more articles or tips like this from time to time.

Ernie

I try to convince my clients to practice ” Continual Management” meaning you run your business as lean as possible in good times and in bad. That means questioning every expenditure, continually looking for ways to reduce costs and increase profit.

I like that thought. It’s all too easy to get complacent!

Because I forgot to say this earlier: good article! I’d like to see more business-related articles on TWS.

Your points are very valid. I try to convince my clients to practice ” Continual Management” meaning you run your business as lean as possible in good times and in bad. That means questioning every expenditure, continually looking for ways to reduce costs and increase profit.

Buyers do look for “upside” in a business when considering purchasing but it is usually based on historical profits. Most small companies don’t have an exit plan and realize this after they decide to sell their business. Understanding and marketing your company’s “upside potential” to buyers is a critical part of the process.

I think that “spending too much money” is a distinct point from “lacking capital”. For one thing, it’s usually easier to moderate your spending than to make capital appear out of thin air (or thick equity!).

You make good points about spending money in the right places. It’s difficult to strike the right balance: you need to be careful not to squander your limited funds, but parsimony can cripple a business too. I think the trick is to ask yourself, “Do I actually need this? Is it just splurge, or is it essential for the business?”

I see what you mean now with the 6 — 8 months figure.

As for selling a business: yes, profit means more than revenue (high revenue + higher costs = debt!). But really, buyers are looking at the expected future profitability of the business. This, naturally, is somewhat open to interpretation.

I think your comments are probably defined in some of my bullet points in question 1. Being under capitalized and not having the required skill set would be included under spending money too early or for the wrong things.

The comment about 6-8 months was not about being successful, the business being flawed or well established. You’re right it takes years for company’s to achieve these. It was about reaching a break even or profitable position to continue to operate the business. Many “great” busineses fail because they are under capitalized to begin with or can’t borrow until they show a profit. Reaching that point is critical to business’s that are highly leveraged.

The comment about spending less the longer your business can survive is valid in some cases but sometimes spending money in the right place, like advertising, marketing etc. pays great dividends and shortcuts your path to success and profitability.

It is important to note that in the business world success is usually defined by how profitable a business is not by revenue, customers etc. When selling a business EBITDA (earnings before interest, taxes and depreciation) is the calculation that will ultimately determine a company’s value.

Thanks for your comments

Ernie

Thanks for your comment. I wish all my clients totally agreed with me!

–They spend too much money too early, on unessential things (offices, staff…)
–They underestimate how long it takes to become successful

These points are related. The less you spend, the longer your business can survive; the longer your business survives, the better it can develop (contacts and clients).

I’m not convinced by the “6 — 8 months” startup time. It takes time to persuade people of the value of your service, especially if you’re offering something innovative. I’d expect most businesses to take years, not months, before they are well established.

Hats off to you if you manage to become profitable within 6 months. But if you don’t, it doesn’t necessarily mean your idea is flawed.