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The insights I have learned over my 30 years of business experience as an investor highlight a critical truth: businesses often go out of business not due to profitability concerns but primarily because they are running out of cash. In the startup landscape, the availability of cash is crucial for sustaining operations and weathering uncertainties effectively.

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 finding ourselves in economic uncertainty and in an environment that is not so friendly for raising capital. A founder relying on the ability to raise capital as a means to infuse cash, can be a very risky proposition, especially for early-stage investors.

Here are few traps that can get your business into a spin:

  • Sales is not a substitute for working capital – revenue is highly volatile at times and inconsistent at best. You cannot rely on 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 / Debt can be dangerous – Money is not cheap these days, 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 uninventable.
  • 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.

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 runway of operating expenses at the bare 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 paramount to your business health. I spoke with a friend 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. I wish to emphasize that in the dynamic and fast-paced environment of a startup, one must frequently navigate periods of turbulence, or “Storms,” more so than in an established business. In such circumstances, it is essential to utilize available resources judiciously, as the success of the enterprise may hinge upon it.

Do you have the cash?