Adequate
capital is essential for any business; lack of capital is the number one cause
of business failure. A minimum
investment is required in order to compete in the marketplace.
This is
especially true for new business startups.
One of the myths addressed in Business Fits is “Start small and
grow.” This seldom works. The idea of growing a business out of profits
doesn’t work. Growth requires additional
capitalization.
When I bought
a Ford/Mercury dealership, my capitalization was under Ford’s guidelines. I could not see where I would use all the
capital. I found out in less than ninety
days. The dealership was in bad shape
when I bought it. It was easy to improve
the business and we tripled business in three months.
This rapid
growth created such demands on capital that we could have been out of business
in four months. As with most automobile
dealerships, the local banks are not large enough to provide all the necessary
financing. I was getting calls from my
banker that he had received a sight draft and we were over our credit limit and
overdrawn. Luckily, I had silent
investors that were initially aware of this potential problem and had the deep
pockets needed to provide additional capital.
I advise new
business startups to project all potential costs. Then go back and revise the estimates to the
high side anticipating maximum delays.
Then double the total and it will probably still be low.
Franchising
is successful partially because a good franchisor will not award a franchise to
a franchisee that is undercapitalized. I
have heard entrepreneurs say they would not buy a franchise because they can do
the same thing cheaper on their own.
This is not true and is a recipe for failure.
Private
sector business requires capital. Unlike
big government, money is not unlimited.
Private businesses cannot just tax, borrow, and spend like there is no
reckoning in the future. I hope we are
getting rid of the political elite with this attitude.
God bless President Trump and guide him
to make America great again.
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