Let’s say you went $100,000 in debt starting a business, and it costs $5000 to operate every month and you make only $4000 every month for the first year.
But you have a house and family, etc.
Where is the money going/ coming from??
In: Economics
They can’t afford to pay themselves, they live off their savings and whatever they can borrow until there’s nothing left, then they have to give up, go out of business, and get as job someplace else.
Where the question has a bad assumption is that most smart business owners pay themselves *before* they pay other stuff. What this means is the “salary” of the business owner is the most important “operating expense”.
So your analysis which places that out of proper order isn’t really a good example.
Something more realistic, let’s assume in a service industry that doesn’t require massive investment in inventory, is:
* You float a loan for $100K to start your business. If your income was only expected to be $4k a month, ***you’d never get the loan***. So you can prove you’ll make $15K a month through your business case, and you have collateral such as equity on a house, and so you can actually get a loan.
* Your business has an income of, say, $15K a month. (That’s only $500 a day in revenue).
* Of that, you immediately take $4K from that monthly income as your own “salary”. You have $11k left. IT COMES OFF FIRST because you yourself are an “operating expense”.
* You then pay $5k of operating expenses for the rest. You have $6K left.
* You pay some of that, say $3K, toward servicing your debt. You have $3K left.
* Then there’s taxes, and however they work into the mix if applicable.
* **NOW THE ANSWER TO YOUR QUESTION:** If the total above is over $15K a month, you’re a business that is LOSING MONEY but your business can still survive a long time. You might have to reschedule a longer loan payment, or make some compromises on operating expenses. You could do some work “under the table” to avoid business taxes and not declare some of its income. There’s other tricks, as long as it doesn’t lose TOO MUCH money in too many months in a row.
* Anything left after that can get invested into the business to help grow and promote it, or you can take it yourself, or you can expand your stock…. whatever. That’s your cushion.
Your initial numbers don’t make a case for a business that could ever get a start-up loan.
The really short ELI5 is that they start with a fund (typically a loan or maybe their own savings). They operate the business and pay themselves out of that fund, and they gradually run that fund down to nothing. Then they go bankrupt.
It depends on a lot of factors and a lot of very fun accounting.
If you’re legit, open the business run it until you feasibly can’t anymore then close up shop.
If you want to abuse the system, you continually say you’re opening at a loss while seemingly everything has linked itself to you and then when everything thinks you might be profitable you tell them you are continually reinvesting in the business and then you just become a beggar looking for “angel investors” when in reality you’re probably using Hollywood style accounting to continually operate at a loss. Look at Netflix. IIRC they haven’t ever actually been (on the books) profitable.
I worked in a startup before. Our salary takes precedence (including the owner) to other expenses. So even if the PnL is negative for the month, it’s been factored in into the expenses. As long as we’re positive at YE, it’s all good. If not, last year’s income will absorb it, the current year’s loss.
There’s also a liquidity ratio that i maintained to ensure that we all get paid on time.
If that’s insufficient, then it’s line of credit.
My old boss would take money out of the business account for anything he needed personally. Anything from bills, food, gas, all living expenses. This also the same guy who would bitch that he didn’t get a paycheck while the employees did. (LIKE WHAT!?!) Also the same business that wouldn’t/couldn’t pay the employees on time consistently because of piss poor book keeping. Definitely not the correct way to run things obviously, but that’s what happened. Small business, total people working including office was like five when I left.
They don’t. They either work a job as they start a business or they are wealthy to begin with and they live off their savings.
TL;DR: they just borrow more and more until the party stops.
Actually, that is *partly how* businesses lose money. In short, it’s borrowed. Publicly traded cos trade shares for equity infusion, and then they do payroll from that. When debt climbs and climbs the company collapses at some point — generally when lenders see that there is little chance of being repaid and so no more loans are made.
The wonders of bankruptcy laws often allow debt to be repaid at pennies on the dollar, or not at all. Then it’s, “Let’s break open the champagne, issue some more shares and keep doing this crime we call business…”
There isn’t an infinite supply of money just because you run a business. There is a really simple formula, profit = sales – expenses. But a particular business might not be profitable , but still have money to play employees, management and a dividend for owners.
The extra money can come from savings the business made during good years, loans or even selling partial ownership to other investors.
For example Apple famously has a massive cash reserve they could use that to pay owners (shareholders) a dividend. Or a cartography company such as navtech that was involved in the early days of building the road mapping database many gps systems use. They operated for years (decade?) before they had something to sell. Relying on loans and investor money.
Every situation is different. There’s no set formula for starting a business and managing the money you initially put in it.
I once worked with a startup founder who was a former Google employee. The way he made it work was that every dollar of his initial seed funding went to the company. For his personal needs, he would sell Google stock as needed.
Prior to the pandemic, I, too, founded a company. The way I managed it was that every little extra money I had went to satisfy the needs of the company. For myself, I would continue working in my other ventures.
Basically, any seed money or investment went to the company 100% in addition to what I was also putting in.
Basically, I multitasked between projects to keep both myself and the company sustainable.
Right now, that’s what I’m doing again. I’m working on two new startups while still doing freelance projects, plus legal work.
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