|My Best Idea Ever Failed for Lack of $$|
If I had a dollar for every amazing idea I've seen in my life that failed for lack of funding, I'd have enough of a cash pile to fund one of those great ideas. Another way to look at the issue of the impact of too little cash regarding a small business, is that most companies that fail do so because of inadequate cash.
Cash as the driver of success is not merely true of start ups. Money is often the bane of mature businesses as well. I have worked with one company who has almost unlimited capability in their chosen field. They already make a wide range of products, many of them successful in the niche that has been exploited. Almost all of these products have proven superiority over other similar offerings in the same categories. In most cases, there is even a likely cost advantage due to low overhead and superior sourcing of raw materials.
In order to take one of these products to the next level of sales the company might need to spend $50,000 or more in risk capital for each product. There is an excellent chance of success. The ROI is very acceptable. But the owner is risk averse, and unwilling to devote the necessary seed money.
You could have the same situation with a risk perverse owner who simply doesn't have the cash flow to risk. Or you could have a third situation where the cash is available, the ownership is willing to go forward, but the competing opportunities or other strategic issues get in the way, such as the plant capacity being maxed, or the distribution channel is pushing back on the idea for some reason.
The startup certainly needs to count the cost. My books almost always contain an entire chapter on startup cost analysis. This startup cost analysis should also be done for any major expansion, new product introduction, move to larger quarters, or opening of a second location or division. Anyone planning to open a new enterprise should have carefully budgeted the opening expenses, inventory needs, initial marketing costs, and expected cash burn per week or month in a worst case scenario. Banks may commonly recommend that you have enough savings or borrowing power to sustain the enterprise for a year or two of worse than expected profits. If everyone did that, we'd have a lot fewer new businesses opening, if you get my drift.
You can start a company with no money in savings as long as you have no overhead or personal need for income. But that is a rare company. Most often we do have rent, utilities, and personal needs that require at least some cash in the beginning. The larger the initial risk needed to open the door, the more cash reserves you should have to protect your investment. If I open with no expense in a home based business, and have only my phone and computer as overhead, I can get by with no savings at all to fall back on. If I open a retail business with $200,000 in opening costs and a $10,000 a month overhead budget, I would certainly want to have another $100,000 backing my play.
What about the mature business? I have certainly seen many such companies fail in the last eight years after the housing bust. But others survived. Asset preservation is key when sales drop off a cliff. Reducing overhead quickly, minimizing outlays, collecting receivables, reducing inventory, bolstering cash reserves are strategies that are likely to have been in play for those who made it.
Some certainly didn't do these things, but were able to keep going through use of personal asset sales, borrowing on personal lines, and putting off creditors. When forced to operate under these conditions, there is generally a dramatic reduction in the effectiveness of the CEO due to stress, and critical personal resources being diverted to managing the disaster instead of the store.
Wrapping it up: Cash is king of logistics. Many of your other logistical decisions are directly dependent on cash. Budgeting is not fun, but properly budgeting may save your company one day.
Action steps for day 21:
- Make a budget for the next three years
- Do a cash flow analysis for the next three years
- Now make a worst case budget and cash flow for the next year
- Review every expense carefully. Do you have to have this expense. Is there a way to cut it.
- Make sure that you are getting a profit and loss statement within days of the end of each month
- Plug the p & l back into your budget and review
- Take a close look at cost of goods and selling prices to see if margins are acceptable