Who’s right about needing more money? Dad or me?

Dear Aunty B,

I am doing a business plan for my new business. I feel positive it is going to be a success as I have come up with a great idea that no one else is doing.  

My question is this: I have worked out all my costs with my Dad. But he wants me to work in a big buffer because he says it will cost a lot more than I think. If I do that then I will have to give away more equity to an investor or borrow more money.

I intend to run it under the old entrepreneur adage: “beg borrow and steal” and also run it from my bedroom, so I think I can keep costs very low for the first year at least. I also have a very low salary in the plan.

What do you think?
Lou,
WA

Dear Lou,

Look at it this way. Many start ups fail because they run out of money. Simple as that. They run out of money for many reasons: poor management, misreading the market, not enough demand for the product, costs are too high, can’t afford the technology you need to make it a success, can’t afford the skills they need and so on.

You also have to realise that you are a true entrepreneur. You are an optimist. Now the good part of that is it keeps you going. You always see the upside and therefore are resilient in the tough times. You also have a greater tolerance for risk. But the downside is you will underestimate the amount of money you need and the things that could go wrong with the venture.

You also have far less resilience in the business when the inevitable happens: such as you lose a great client, your technology collapses, a supplier packs up shop, your business partner gets sick…

In a nutshell, Dad is right. You need a BCEO – the Buffer to Counter Entrepreneur Optimism. All entrepreneurs should add it to anything they do.

And one more thing. It is the end of the first year going into that second year when things are hardest. Most business plans I have seen by young people always have their sales trajectories going one way. Up.

Often sales in the second year are lower than the first. Yet another reason for the BCEO.

So go and buy Dad a big Christmas present!

Good luck,
Your Aunty B