Nothing is more important to a new business than controlling operating costs. Last week, I laid out the basics to the typical overhead that your average business requires. As far as this lesson is concerned, it doesn’t matter much whether you are starting up with your own money, credit from a bank, or funds from an outside investor. Simply put, out of control costs will kill your business–dooming it to the 50% of start ups fail in the first year club. Regardless , to be profitable, you need to think critically about your operating costs, pricing structure, and how much you require to meet your own personal expenses.
Where is the best place for your business? You would roll your eyes at me if I said to you, “Location, Location, Location,” if you are starting a restaurant, a retailer, or anything that requires selling multiple products. No brainer, right? But what if you are a service business, or your product is being sold to retailers and online? What then?
Like hiring the first employees, I avoid renting/leasing office space for as long as possible. (My logic will come at the end of this post.) You MUST realize that after buying office supplies, furniture and a down payment, leased office space is a regular chunk out of your budget when cash flow is around zero. This is just as true a dirt-cheap office of 600 square feet boxes (offices are often priced by the footage) in a rural area as it is for a Silicon Valley loft. So what is the alternative?
The way I see it, you have two options: run your business launch from home or share office space with an established company.
Running a Business From Home: Talk to your accountant or business mentor about establishing a section of your home or apartment as a “Business Only” area. Set it up as a distraction free work zone, and make this clear to your family and friends. A good desk, a computer, and a file cabinet are all you really need. With the low cost and the tax benefits of a legit home office, this is the best option above all others.
Share an Office: If you absolutely need an office to start. Shop around for a related business with extra space to spare. Can you trade your services to lower rent or offer other incentives? Quality relationships between your team and the renter’s team is critical if you go down this road. The last thing you need is to manage drama. The best outcome here, is that the relationship is so good that you find a business partner or even merge with the company, giving your start-up a much needed boost into the market place.
Nothing can add legitimacy to your new business like a brick-and-mortar place of business, but the commitment of a long-term lease can shackle you with unnecessary costs. I can tell you that it does make the process real and exciting. But don’t ruin your credit or reputation based on the feeling that you need an outside office.
My hope for you is that eventually you will own your place of business. The logic is that as long as you are paying off your mortgage, you are building equity. You are gaining something real even if you don’t have a dime of cash profit to show for the mont. So hold out as long as possible with a bigger goal in mind.