Probably no surprise that finances should be the number one concern for any new business. The number one reason for a business failing is undercapitalization. A going business runs on money, and a new business burns money on things that will not directly result in any income. Your startup capital has to last through several months (years in some cases) before you start to see a return on your investment.
What can you do? My advice is to start small and divide your purchases into revenue and non-revenue generating. Preserve the capital you are starting with by keeping your initial costs as low as possible on non-revenue related items bought for the business. Buy revenue generating capital equipment only when it becomes painfully obvious that the item is needed to run the business. Try to buy desks, chairs, filing cabinets, etc. in good working order, but used, rather then paying the full price for a new item. You may be able to locate many items for free by checking your local newspaper classified section under ‘Free for Pick-up’ or a similar category name. I have seen desks, chairs, filing cabinets as well as other useful items offered for the price of picking them up from the owner. Why would someone give away what they could sell? Easy, it has something wrong with it or they have bought a new one and just want the old one removed.
Can you go overboard in buying used instead of new? If you are buying a used desk, there is little chance that something will go wrong enough so as to make the desk unusable. That’s because there are a limited number of moving parts and something like a broken desk drawer can be fixed or overlooked. The desk will still work fine. That is probably true for most of the non-revenue producing furniture items a business needs.
Certain core asset business items, things you are going to use directly in making revenue, are a different matter. Consider a startup machine shop looking to buy a computer controlled end mill. The mill is to be used to produce a custom shaped aluminum heat sink for a product being manufactured per a customer’s specification. The shop owner did the right thing in waiting until that particular CNC (Computer Numerically Controlled) mill was necessary for the operation of the business before buying it. The flip side of the coin is, in looking to buy a used end mill the entrepreneur may not be able to locate a suitable item in a timely manner.
Second, buying a used core asset like that (lots of moving parts and electronics) carries a certain amount of risk that it will not work right. There are always exceptions to this. You may know the person selling the mill personally and/or the tool’s history. If you know machine tools (big help if you are starting a machine shop), then measuring the tool’s operation and comparing them to the numbers in the mill’s user manual would be a giant help. Like buying a used car from a car dealership, the mill might include a warranty as to its operation from the seller. Especially if the seller is in the business of buying, refurbishing and reselling machine tools. Subcontracting the milling work out to a machine shop that does have the right piece of equipment is another move you can make, but your profit will be significantly reduced. Still, that will do one important thing in buying you some time in the whole process.
Depending upon how much work you are going to need the end mill for, It may be smarter to buy a new one at full price from the manufacturer and pay for the item from the profit of manufacturing the heat sink. Most startup companies do not have to consider this, but there is a reduction in tax on profit from such a capital asset purchase. Also, there is a resale value you can recover from selling the mill later. While I am thinking of it, big dollar capital equipment purchases need specific accounting for tax purposes, so refer to a qualified accountant to get the particulars on your state and federal government tax filing.
There are some capital equipment items that fall between the two revenue categories. They may not directly effect generating income, but do effect a customer’s perception of your operation. Perception influences future orders and referrals. Things like phone answering machines, FAX equipment, computer printers, optical bed scanners, etc. are needed by the business, but in most cases do not directly make money. To an extent, the paper products you use fall into this middle ground. It is easiest to bias these item types toward revenue producing, and buying on need.
Watching your expenditures from the beginning will greatly improve your odds for success in your business.
