This is the final piece of a four-part series asking, “Do you have it in you, to be an Entrepreneur?” There are four key strengths that are must haves for an entrepreneur to be successful. Previously, I discussed the Passion, Guts, and Team. Here, we’ll discuss Cash Flow.
What is cash flow? Wikipedia’s definition is fairly straight-forward: “Cash flow refers to the movement of cash into or out of a business, a project, or a financial product. It is usually measured during a specified, finite period of time.”
There are entire courses available on studying cash flow delving into whatever depth of detail you desire. As an entrepreneur it is really simple.
You need to have enough cash to pay your bills. Period.
You and/or your business can be horribly in debt. You can even be insolvent (owe more than you’re worth). As long as you have cash on hand to pay bills as they’re due, you can continue to survive another day. But, as soon as you start failing to be able to pay your bills, the clock starts ticking.
This sounds obvious, but insufficient capital (cash) is one of the main reasons new businesses fail. And, for the new entrepreneur there are some very basic causes to watch out for.
Accounts Receivable (AR):
AR is the fancy term used for how much others owe you. Family and friends are chief among these. They may mean well, utilize your services and owe you money, but take liberties with when they’ll pay you. After all, you’re friends, right? You won’t mind if I need another week (two, or three) until I can pay you. Right? And it accumulates from there. Before you know it, you have a half-dozen (or more) people, who you’d think would be your best customers, having not paid you.
The other hazard are large customers who think nothing of delaying payments to their vendors (i.e. you). Instead of paying within 30 days, they decide to extend payments 45, 60, 90, 365 days.
Seriously, 365 days, you laugh? One example: We had a service and maintenance contract with a Fortune 100 customer (surely, they can pay, right?). Each year’s payments got stretched further, and further. Eventually it got so bad, they hadn’t paid for the prior year’s contract even as they were negotiating for next year’s contract. The only way we got paid finally for last year was by refusing to renew the contract.
As a new entrepreneur you—cannot—allow AR to be mismanaged. You’re better off thanking a customer for their business, and ending the relationship, than continuing to provide services for which you don’t know payment will be received.
Even if your business is custom designed paper airplanes, you need cash up-front to get started. Very rarely can you get started without ‘any’ cash. Even if you can, at some point you will need more cash in order to grow further.
Classic example is having won Customer 1. You spend what cash you have on hand to start working on your deliverable. Along the way, before Customer 1 has paid you, Customer 2 has come along. Now, you need more cash so you can start this next customer’s project—without yet having been paid by Customer 1. This effect can rapidly snowball and, at some point, you cannot do anything…because you’ve run out of cash.
This is another very common problem for new companies. Payments from yesterday’s customers is too small and/or too slow to pay for all the start-up work demanded by the larger number of new customers coming in the front door today.
In recent years, you could simply go to the bank and ask for a line of credit, and they’d give you $40, 50, 75K. No questions asked, almost literally. Having a line of credit is one tool for helping a business smooth out cash flow disruptions. But in today’s post-‘08 recession, credit for new businesses is going to be very hard to attain.
Cash is king. It is the liquid keeping your venture alive. Without it, you’re dead.
As you start your new business controlling cash flow is paramount. You must make sure you’re paid and in timely fashion. Don’t allow others to take advantage of you, intentionally or not. Next, manage expenditures tightly. The extra dollar you spend in your early years may be the dollar that lets you take on that next new customer.
To the best of your ability, try to project out how much cash you think you will need. Make sure you have a source of cash (lots in savings? a day job? wealthy uncle…?) sufficient to support startup, initial operations, and hoped-for growth.
The time to evaluate how much gas is in your tank is before you start on your road trip.
(Photo Credit: www.sxc.hu #1237498)
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