The sniper from Seal Team 3 had been in position for three days. Scott (not his real name), was on a rocky hillside in Helmand province in Afghanistan, observing a small square, whitewashed building waiting for his target to emerge.
If his target didn’t come out in the next three hours, Scott would have to abort his mission.
He was lying motionless in a shallow grave under a sisal mat that he’d covered with stones, broom grass and buck thorn.
It was summer and the temperatures hit over 100F in the searing midday heat.
The spiky, thorny bushes provided the perfect camouflage for Scott and his adapted Mark 12 Mod 0/1 Special Purpose sniper rifle.
His camouflage was so perfect that a passing Afghan shepherd urinated into the same bush an hour earlier, completely unaware of the American sniper just a metre below him.
Finally, his target emerged and sat in the doorway, engaged in earnest conversation on his mobile.
Ignoring the pungent smell of urine trickling into his side, the flies and stultifying heat, Scott steadied his breath for 1 minute, adjusted his sights for distance, wind speed and squeezed the trigger.
He tried again.
Scott cursed under his breath.
The dust had jammed the gun.
He was livid.
But he would have to deal with his rage and frustration later.
For now, survival was key.
He had to make it back to his pick up rendezvous three miles away.
Like other soldiers, he had to fend for himself and work on fixing his own weapon whilst retreating and avoiding the Taliban gunmen who would quickly discover his hideaway.
Scott’s fight for survival led to the rifle manufacturer losing their battle for survival.
In August 2015, the iconic 179 year old Colt company that manufactures the US Army’s rifles, said that they could run out of cash and could file for bankruptcy.
Loss of confidence amongst users, cancellation of major Army and police contracts all contributed to a loss of sales and a draining of cash reserves.
Business Survival is about Cash
Cash is the only life or death issue for any business and as Benedict Evans points out in his excellent analysis on Amazon, your business can remain unprofitable for nearly 20 years, but have excellent operating and “free” cash flow, which sustains growth.
Achieving financial success for yourself and your business requires a careful approach in creating the most value for your customers aligned to flawless implementation of a systematic business process.
Your financial success depends on your ability to earn and strictly control cash.
The “Truth Bombs” in this article
- The Wall of Shame – hundreds of thousands of smart people starting new businesses and burn all their money, speeding up their failure.
- The three golden rules for financial success – ignore them and you’re guaranteed to fail.
- What to do when you get your funding – and that doesn’t include a party!
1. The Wall of Shame – Ten fatal financial mistakes by almost all start ups, including really “smart” owners:
There is extensive research on what causes small businesses to fail and I have listed them here for you NOT to repeat.
As you go down this wall of shame, note that bad decision making underpins most of the mistakes.
Non measurable, bad advertising:
Most owners are overwhelmed by media sales staff selling space and are panicked into spending and commit to long term campaigns without being allowed to test it on their businesses.
Many owners mistakenly believe that expensive marketing brochures, logos are critical to success BEFORE their businesses have evolved.
Wasted Pay Per Click Advertising:
The biggest way small businesses drain their money is investing in PPC (such as Google Adwords) without knowing how to set up the campaigns and manage them.
The next highest on the list of money burnt on chasing the social media dream was Facebook, Twitter and large email lists where owners didn’t know how to manage campaigns effectively and believe that friends and followers are the same as buyers.
Waste of Space:
Thousands of incredibly intelligent people overpay, overspend and overbuild on their leases, stores, building improvements, telephone and AV systems, signage and office equipment to impress potential customers and to make a statement about their new business and their image.
Databases and software:
Millions of dollars thrown away by new businesses investing “for the future” (that never arrives) on sophisticated tools, databases, Marketing, Finance and CRM systems.
Customised websites that earn no revenues are in huge demand by naïve owners who buy too much and too soon and the sensible options of mini sites, blogs, video and squeeze pages are ignored.
The speed of technology changes means that websites are a commodity and not critical in the value flow of a business.
Rather than invest in freelancers or temporary help, new owners rush to hire and train talent but use cost because of tight budgets rather than quality and pay for it in the long run.
The hands on approach required for new staff during the early phases of a start up meant that owners are training rather than focusing on the revenue generating parts of their businesses.
Legal, Banking and Consulting fees:
The fear of non compliance results in over excessive filing, legal fees, trademarks and copyrights with many fee structures being initially cheap and then ramping up.
Owners delirious with cash were in a frenzy to grow too big, too quickly focusing on having a presence rather than driving volumes and cash from existing assets.
Not enough money:
Almost all entrepreneurs underestimate the amount of cash needed for their businesses and within months of opening suddenly realize that either revenues are slower than planned and expenses are much higher than expected, causing a cash flow crisis.
Attempting to obtain further funding from a weakened position is futile as most banks don’t like to lend on projection based revenues, preferring to rely on actual results and how the account is managed.
This further weakens your cash position and then your business is forced to close.
Too much inventory:
Inexperienced business owners take too many risks by buying in excess inventory which results in additional storage costs and the inventory becoming obsolete if demand for the products fall.
2. Three golden rules for financial success:
It is often said that numbers are the language of business and the life or death number for any business is cash flow. One of the critical things for any business is ensuring that your startup capital lasts long enough to ensure your business reaches maturity.
There are three rules that you MUST follow religiously on a daily basis:
Rule number one: Protect your capital at all times.
In the first three years of your startup, being really careful with what you choose to invest in is the difference between success and failure.
Your customers know you’re a start up and will understand if you don’t have the best office, cars, computers, logos and website on day one.
Build in contingencies for seasonal sales fluctuations, unplanned expenses and late payments.
Rule number two: Keep your gross margins as high as possible.
Reject all temptations to drop prices just to win business in order to “establish yourself”. It drains your cash.
Focus on premium pricing by bundling extra products or services into your basic offering to add extra value to your customers.
Price match a competitor if you really have to but avoid working on low margin deals that take up as much time as high margin effort.
If you are creating genuine value in your customers’ eyes, they will pay a premium for it.
Rule number three: Manage your cash flow on a daily basis.
Cash will initially leave your business at a faster rate than cash coming into the business and you must not be caught in the gap in between cash out and cash in if you are to achieve your dream.
Cash flow: Why is it important to make your cash go further?
The first point to remember is that your cash inflows will be very different to the rate at which you earn revenues.
It’s possible that your business is profitable but you’ve spent all your cash.
The travel industry is a good example where customers pay 20% deposits for holidays to be paid for 6-9 months later but you incur all your expenses during those 6-9 months.
You require additional capital or cash reserves to keep the business going during this period.
Watch your short term borrowing needs very carefully.
I’ve separated this out because the speed of change is now hours rather than months and the uncertainty of the global economy may affect you in any of the following ways:
- Suppliers increase prices to you because of rising costs related to oil prices and currency movements
- Interest rates increases affect your funding and costs to your suppliers
- Weaker demand for your products / services due to customer nervousness and lack of confidence in the economy
- Heavy price discounting by your competitors to maintain market share
- Global online competitors increase market share in your market
Any of these impacts will require you to have extra working capital reserves and I’ll show you how to build this into your funding plan.
3. You’ve got funding! 20 things you MUST do before you spend even $1!
Whatever your business idea, preserve your cash and make it go further in the first 12-24 months. The checklist below gives you ways on how you can maximize the amount of cash coming in and also reduce the amount and timing of cash leaving the business.
Checklist: Twenty key actions to protect your cash.
Before you start trading:
Manage cash daily – stay on track every day
Review your cash flow statement and balances at the beginning and end of every day.
Cash problems don’t suddenly turn up – they’re the consequence of unplanned spending and mismatches between inflows and outflows.
Have a “Just In Case” cash stash
When you analyzed the funding options for your business, you may have come across some additional potential lenders.
Turn to these “secondary” lenders and see whether you qualify for any special lending programs and/or additional lines of credit that you can call upon.
You will always have unplanned expenditure or periods of poor cash flow so line up options before you face the emergencies.
Negotiate hard on all contracts
Look at every single situation where you have to sign a contract for products and services and either (a) negotiate big discounts for exclusive relationships for a given period of time or (b) negotiate additional added value services for the prices being quoted to you in exchange for loyalty periods.
If you’ve already signed a contract, renegotiate it if you can.
Cut back on travel related costs
Focus on the more profitable trips and do everything else via Skype.
Slash your Professional Services fees
Accountants, consultants and lawyers are skilled at identifying new opportunities for themselves and although their offerings are usually excellent, the bills quickly add up.
Ask for substantial discounts or shop around and check the billing terms very carefully.
Are you paying by the hour, day or 15 minute spells?
Review Insurances and Licences
If you are intending on trading as a sole proprietor or a partner in a firm, make absolutely sure you have all the public and personal liability insurances as you are personally liable for losses.
If you’re trading as a company or corporation, look closely at the types of insurances available and strip out any non essential cover.
Buy or Lease
Buy assets that appreciate and lease everything else, especially if it depreciates fast.
It is pointless spending $30,000 of hard earned cash on assets (e.g. on office furniture, computers, cars) that lose all their value in a few years.
Lease as much as you can so that you’re paying a small monthly amount rather than a large cash payment upfront (ask your accountant if there are tax benefits of doing so).
As a start up your customers will understand if you had to purchase your equipment and services from eBay or specialists in second hand or used equipment.
Look up and move to the cloud.
As with the buy or lease savings, do NOT invest your funds in buying the latest IT that will never get used for the purpose its was meant for – e.g. sophisticated business intelligence, Photoshop (unless you’re a design business!) or expensive CRM systems.
You can lease 100% of your IT needs by buying the software as a service, in other words, all your applications are accessed via the Internet and saved to safe, virtual storage using the latest technology in return for a small monthly payment.
It’s safer, you get more functionality and you only pay for what you use. This can include all your email, internet, CRM (Customer Relationship Management), billing, payables, purchasing and accounting systems – all available online and from anywhere.
Speak to your Landlord
In an earlier article on bricks and clicks checklists, we looked at all the options for getting the best commercial property and negotiating the price down.
Push hard to get a lower overall cost, whether this means a “rent free” period for say the first two years in return for a longer lease, or a stepped increase based on an agreed formula.
Alternatively, you could tie in the increases to your sales levels.
Be careful about providing personal guarantees for leases – do not do this without getting legal advice. My advice is to avoid doing it under any circumstances.
Use interns or temporary staff rather than hiring
Reduce your expenses by delaying hiring staff until you have built a sustainable revenue stream.
Look at all your potential costs and see what you can outsource for a monthly fee rather than hiring staff.
Opportunities could include storage, deliveries, accounting services, design, marketing, IT support, repairs, sales calls and customer research.
Do NOT outsource activities that are directly related to your customer experience such as Customer Enquiries.
When you begin trading:
Once you’ve started trading, stop your cash draining out of your company by implementing the following actions:
Offer your customers different payment options
Encourage the use of credit cards, Paypal, early payment discounts, prepayments and payment upon sale before you deliver products and services (if you can).
Actively manage outflows every day
It’s your business, so personally approve every payment and whenever possible, delay payments by agreeing delayed payment terms with your suppliers.
Use charge cards which may get you up to 56 days free credit (some even offer early payment discounts) and see if other businesses are prepared to trade products and services with your company.
Collect your money early
Establish clear payment terms and do not extend credit terms to anyone for longer than 30 days.
Monitor your receivables on a daily basis, ensure all customer contact details are correct and collect everything before accounts become overdue.
Sell your debtors / receivables
If you’re in a business where you have a significant level of late payers, you can sell your receivables and receive cash upfront.
But note that the downside of doing this is that the factoring company will charge a fee and also return the debt to you if it’s non collectible.
Negotiate on Credit Card processing fees
Credit card processors charge fees for the service and every transaction so shop around and negotiate for lower rates or higher thresholds in return for exclusive business.
Check whether having your own credit card processing equipment entitles you to lower fees and if so, buy it second hand or lease it.
Just ask for Discounts
In this economy, no matter what country you’re in, all businesses are desperate for business and are always prepared to agree deals.
They may not publicise this, but always ask before committing to any order.
Join buying alliances where groups of companies pool their resources to take advantage of bulk buying discounts.
Always review your space requirements
Review your commercial property costs every three-six months in relation to your business performance and the local environment.
If your space is too big, consider sub letting to a complementary business if your lease permits it (e.g. a retail business that would increase the footfall into your area).
Alternatively, look to relocate if you find a better area that fits your customer profile and rent out your own property.
Other ways of saving cash could be to pool together warehouse storage, office, retail or distribution space with other local companies to share costs.
Stop Paying for Stuff You Don’t Need
Continually look at all your assets and sell anything you don’t need and lease it instead.
Review your headcount and staff requirements – look for opportunities to change working patterns to reflect business activity and reduce costs (without affecting your customer experience) and look for opportunities to share certain services, such as cleaning, deliveries and maintenance.
Find your tax breaks
Depending on your region or country there are different tax schemes that are aimed at supporting small businesses, from the way investors inject cash into the company to allowances, deductions and tax reductions.
Ask your accountant or investigate online for where you can save cash or improve your tax position.