29 Nov

Cash is Always King

Startups and business in general have many challenges. The biggest ones always involve money. Do they have enough to operate, can they make enough to stay in business and too many people wanting their money.

Having enough money to operate, in simple terms cash flow, is critical. If you don’t have enough cash then life support may not be able to keep you in business. Ensuring you don’t waste it on things you don’t need is a big challenge for small business startups. What are some of those wastes?

Poor Accounting Practices. Yes not managing your money through good and accurate accounting is a key contributor. Here is an example to illustrate:

Bob has a small $250,000 business providing product to several manufacturing companies in the area. A very large one has offered him a contract for the product. The value of the new contract is over $5,000,000. Bob believes he now has over $5M in sales. Except Bob has a problem; the new contract only pays 92+ days after invoicing. Bob only has enough cash on hand to support his existing and new business for 30 days. Bob doesn’t know how much inventory he needs to purchase, if he has adequate capability to do the work or if he can obtain enough cash to get through the challenge. Poor financial management on Bob’s part to not have adequate cash on hand to operate his business can put Bob out of business, even with this new contract.

Not enough sales. It is not uncommon for a new business to have a lucrative client base at start-up only to discover a few months later that their client doesn’t need as much product or services as they can provide. Revenue falls and the business owner must now find new sources of revenue. Do they find one large customer, several customers of different industries, any customer who can provide revenue?

Poor workforce performance. Whether the business owner is the only worker, a partner or a couple of employees it is not uncommon for a small business to have poor performance because the time to monitor performance does not seem to be there or, the owner isn’t certain how to do it. Sometimes this poor performance is a family member on your payroll, or managing performance processes is not understood enough to reduce waste and error, causing a negative cash outlay that reduces operating funds and ultimately profit.

Poor business relationships. This, much like poor workforce performance, is a problem. This could be an absent but demanding partner, a business coach who only holds you accountable and makes you feel good about your business, an insurance provider that over insures you, etc. Each depletes your available cash and limits your operating ability. If you have any of these then get rid of them; they add no value. As a general rule, in my experience startups don’t need business coaches, they need a Business Analyst skilled in developing small business with facts and not emotion. However, if you feel you must hire a Coach, then think about their credentials and how they will demonstrate true measurable value added.

So what should you do to ensure that your business doesn’t experience these chronic money problems? How can you manage and operate your business and avoid or eliminate the cash flow problem?

Learn how business works. Use resources available in your community to help you run your business effectively and profitably. Tech schools and Universities are a good start. Many have free resources available to get you started but understand information that is free is often very limited and generic. It may not be for you.

Understand how YOUR business operates. How do you make money, what is your cost of goods sold, how do you get customers and how efficient is that process? Do you regularly track things like waste and error? How do you retain customers and do you offer an upsell when they buy from you?

Know the difference between need, want and “I can get that later.” Do you need an office? Do you really need that employee or can you pay someone on a project basis for the work? Do you know how to account for your business finances or is a book keeper a better more efficient idea?

Your business is too important to simply run it without hard facts and numbers. Emotion, “I think” and bad money management will send your business into the junkyard prematurely. Understanding how to manage your money, and the relationships that impact it is a critical business skill. While cash is critical for any business, it is even more critical for a start-up business. 85% of all startups fail in their first 12 months of operation. Be a survivor; be part of the 5% of startups that last.