Don't Spend Money Starting Your Business

September 16, 2018

Lots of people ask me what they should buy before starting a refurbishing business, and they are usually surprised when I tell them not to buy anything (aside from inventory, of course).  Maybe a screwdriver kit from iFixit, because that's obvious.  Maybe a desk to work on, but that shouldn't be paid for -- it should be found in an alley on trash day.

Look for absolutely every excuse to NOT spend money.

Your freedom as a business owner depends on having a positive bank balance.  When that runs out, you're done.  Think of it like a game -- the world wants to rob you, and you're not going to let it!  Instead of proactively spending all your money, or even worse, going into debt, you should do a proof of concept and let the demands of the business transactions you encounter tell you what you need to buy. In a transaction-based business, it all comes down to the ingredients of the transaction. The sum of the costs involved (your cost of goods sold) should be less than what you sell it for. Sale price minus COGS equals profit. The transactions you engage in should ALWAYS produce profit.  If they don't, you're doing something wrong.  Yes, there may be capital expenditures that you end up having to endure in the long run, but for now let the requirements of the transactions -- laptops right in front of you that you are going to repair and sell -- tell you what you need to buy.  And even then, try to find workarounds.

It's all about proving to yourself that you are building a ship that floats and doesn't leak.  If you buy piles of expensive equipment just because you think you'll need it, and you rent a retail space just because you think you'll need it -- because that's what everyone else is doing, after all! -- you will cloud your vision and make it very difficult to know if your ship is sinking or floating.  You'll find out eventually, but by then it will be too late to change course.

Don't quit your job without doing a proof of concept first.  A proof of concept is a small, relatively less-risky version of the business you are planning to create.  It's a test.  For this test, use an inconsequential amount of money, i.e. an amount that you could lose without putting yourself in a catastrophic situation.  A proof of concept could be, for example, to turn $1000 into $2000 inside of a month. 

My own proof of concept was to make $3000 profit within a month, and I gave myself $3000 to work with.  Only then would I allow myself to quit my job.  Fortunately my concept was viable and I was motivated enough to make it work, and so I quit.  But if I had only made $1000 profit, or worse yet lost money, I would not have been in a catastrophic financial situation.  I would have been able to examine what I did wrong -- why the transactions were not profitable, or why there weren't enough of them -- and been ready for another attempt the next month, all with my corporate paycheck still keeping me afloat.

Essentially, it's a science experiment:  Create a hypothesis, test it, evaluate the results, then repeat.  If you have no hypothesis to start with or any means of evaluating results, you're driving blind and certain to hit a wall.

 

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