No venture ever succeeds without confident, enthusiastic leadership
around a mission that will attract employees, investors and customers.
But this rosy outlook can become a liability – especially when dealing
with financial projections.
Running out of cash is what ultimately kills eight of 10 businesses within 18 months of opening, according to Bloomberg. Here are lessons to keep your business from becoming a cash casualty.
1. Estimate the amount of time it will take to be profitable -- then double it. This
is a key area where optimism does entrepreneurs more harm than good.
Five years ago I opened Stone Korean Kitchen, a restaurant in San
Francisco. My partners and I all had serious financial chops and
experience starting businesses. We put conservative assumptions into our
financial models, but we were still nine months off in getting to
profitability. That’s nearly a year of cash flow we didn’t anticipate
that we had to cover out of pocket.
Related: How to Anticipate Cash-Flow Problems
2. Hiring must lag behind the need. Ecommerce site Fab.com was once valued at $1 billion. But since that peak, the company has struggled and recently entered another painful round of layoffs as it cut its staff down significantly.
Same thing happened with humor-site Cheeseburger Network, of LOLCat
meme fame. After it raised $30 million in venture cash in 2011, it had
to lay off one third of their staff last year. This story is repeated
time and again. “How did you think I felt? Shitty obviously,” founder of
Berlin startup Glossybox told VentureVillage after it shuttered offices in seven countries.
Startups must stretch the capabilities of employees to the point of
pain. That hurt then dictates where money should be prioritized with
more hires. Believe me, the pain of layoffs
hurts more than stretching the ability of your workforce. Growth should
lead investment, not vice versa. The exception is when you have signals
that you’re winning in your market and it's time to double-down on
hiring to grow. Then it’s time to play to win -- but not a moment
before.
3. Mind-meld with your CFO. While founders like to
chase “shiny objects,” a gifted financial captain can help steer a
course toward that goal or administer a needed dose of reality.
The key here is a relationship where the founder and the financial
officer can finish one another’s sentences. Being lockstep with your
head of finance helps make sure there is the right alignment around risk
vs. rewards.
Related: 5 Tax Planning Tips for Your Small Business
4. Build a war chest. Just like you should have a
personal emergency fund to run your home for at least six months without
income, startups need to build a war chest of funds -- be it cash,
venture capital or lines of credit -- to cover shortfalls. (And the best
time to think about raising money is often when times are good, and you
don’t necessarily need it -- because when you need it, it’s often not
around.)
The economy could sour, the business may need to take a hard left
turn, or you may need to make a market winning investment with a short
-ime frame. Your war chest gives you freedom to maneuver.
5. Don’t be penny-wise, pound foolish. Bootstrapped
businesses are great at growing lean. Yet the flipside is being consumed
by worries about being cost effective rather than spending cash on
things that will lead to topline growth.
Understanding the time horizon of an opportunity can be a little like
reading tea leaves, but it’s important to know if you have a great
opportunity in the market but a small time horizon before another
competitor gets there. The risk of overplaying your buildup could be
worth the reward of owning that space...
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Source;Dan Yoo/entrepreneur.com
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