I have learned from my 25 years of business experience that companies do not go out of business because they are losing money or not making money. They are going out of business because they are running out of cash!
I have heard many times the saying; “When the fats will get skinny, the skinny will die”. In many conversations, I had over the years with startup founders say; “We expect to have enough revenue to support our growth”. Well, this is the first critical mistake in business thinking. Especially today when we are heading into economic uncertainty.
Here are few traps that can get your business into a spin:
- Sales is not a substitute for working capital – revenue is vilotel at times and inconsistent at best. You can’t count on your revenue to fuel your growth. The revenue is for operating cash And to pay for your overhead and operating expenses. If you start spending your revenue to support your growth, you risk running out of cash very quickly.
- The line of Credits can be dangerous – Money is cheap and gets more expensive by the day, yet it can get you in trouble because it puts the debt on the books and creates a bad habit and makes you highly uninvestable.
- The business is first, the owners are second – in the first few years of your business, you need to know that you, the founder, are last on the list. Do not start a business if you can’t support yourself for at least 24 months.
- Cash can be expensive – when you do not need it, it can be very cheap, but when you really need it can be very expensive.
- Cash to business is like fuel to a car – without it, you can’t move. – in the first 24 months of your new business, do not spend your cash on anything that is not essential, be prudent and nimble.
Here are some power tips for managing your cash:
- If you have it, you can leverage it.
- Use it for operating your business, do not invest it in a risky endeavor, try new things or develop risky products, it is not the time, stick to your core business.
- The fact you have cash does not mean you need to spend it. Rainy days will come, they always do. And soon it will come down hard.
- In today’s economy, a business should have a cash reserve equal to 12 months of operating expenses at the bear minimum.
- If you want to reap the fruits of your labor, you need to water the tree.
- Having cash makes your business highly investable and bankable.
The bottom line is that managing your cash is the most critical thing for your business health. Point is the case, I have spoken with a fired person that started a startup in Miami at the beginning of the year. Last night his business got hit by the storm with massive damage. He did not manage his cash carefully and there is a 90% chance that he is going to lose his business. He does not have the cash to restart his business, by the time the insurance companies will handle his claim it will be too late.
My point is that in a startup world you need to deal with “Storms” more frequently than establish a business. If you have cash, spend it like your life depends on it – because it really is.