The Truth About Cash Flow
Steel yourself for this: cash flow issues can happen to any company of any size at any time. I don’t care if you’re a $500,000 business or a $500 million business, at some point you will go through a cash flow crunch and need to have a backup plan at the ready. A lot of people think, “Oh, when I hit $50 million, I won’t have a cash flow crunch anymore.” Expect the crunch: it’s part of business. When it occurs, it doesn’t mean you aren’t good at business. It only means you need to better anticipate and prepare for the “crunchy” months far ahead of time.
CEOs often believe that once their businesses begin to generate seven-figure revenue, their cash flow problems will be over. That couldn’t be further from reality. Consider the fact that every day you read in the news about a major business corporation laying off tens of thousands of employees. Giants such as Hewlett-Packard, General Motors, IBM, and AT&T have laid off 40,000 or more employees during the past few decades. Why? Largely because of cash-flow issues caused by a variety of circumstances.
Business owners must be well aware of the fact that being bigger doesn’t make a company invulnerable. I readily admit to my clients that I have had my share of cash flow issues, even during some pretty large growth years. Why? You need to continually invest in your growth and sometimes it comes after a period of development in your revenue streams, systems, or your team. Or, it may be time for a course correction. Business and the market are changing so quickly these days that you must keep an eye on what is coming down the pike – not to be fearful, but to be smart. Some business owners seem relieved to hear that this is a relatively common occurrence and not necessarily a failing on their part.
Prepare for Cash Flow Crunches
In order to be prepared for your inevitable cash flow crunches, you must be as revenue-focused as possible through sales, marketing, and relationship-building efforts. If you can generate enough cash flow and reserves, you’ll rely less upon money from investors and require fewer partners. You’ll gain the immediate luxury of more freedom and independence and some wiggle room to experiment and fail before everything clicks.
On the other side of the equation for many companies are the systems. CEOs of various start-ups often feel that they can’t function without a substantial amount of seed money to build their supportive systems. They end up rapidly depleting their cash because they don’t understand how to build or scale a company. When the money diminishes, they have to start raising money all over again – which is a ton of work and an unbelievable amount of stress.
Before bringing in investors, I believe it’s far better that you first build your systems, foundation, and revenue model on a shoestring to get your sales cranking. Once you have a flowing revenue stream—even if it’s just a trickle at first—you can go after investors. This way you’ll be more likely to spend the money where it needs to be spent, rather than on trying to figure out your business model and then blowing through everything provided to you. Steve Jobs did not have investors when he started out in that garage. He worked hard at selling a bunch of computers.
I’m convinced that many of the start-ups that fail do so because they receive gobs of money and react as if this is the end-all panacea—when it’s not. What truly gets a start-up off the ground and flying are sales, sales, and more sales; the revenue model; the people; the product/service creation; cost-efficient, high ROI (return on investment) marketing; and the bare-bones systems that are just enough to bring in some revenue.
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