A fact confronting all entrepreneurs is that everything in business will not stay constant. Conditions are always changing. Although some changes arise suddenly and unexpectedly, every business goes through four general phases. The key to survival is recognizing what phase you’re in and avoiding regression.
The first phase is starting the business and funding it with personal cash. Your goal of making money can’t happen without initial working capital. This pays for things needed to accomplish the work that ultimately generates revenue. Insufficient beginning capital is a primary reason for business failure. You likely need twice as much startup funds as you thought, and phase one will probably last twice as long as you expected.
In the next phase, you’re gaining sales, but the business isn’t generating enough cash to pay all the bills. You’re still using startup capital plus spending incoming cash to fund further growth. You want to move through this stage quickly before depleting all your capital resources. In phase three, the business finally has sufficient cash flow to pay you. This is when advice from an accountant will help determine how much owner compensation the business can afford. More importantly, tax planning in this phase is valuable.
In phase four, the business can finally give you a recurring paycheck. The business still has profit after paying you. That permits the business to fund your retirement, expand or have increasing value to a potential buyer. This situation may last for years, but don’t panic when changing conditions compel stepping backwards for a while. Remember to evaluate financial statements to understand your business phase.