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While sometimes apocryphal, start-up failure rates tell a sombre story: most start-ups don’t see their third anniversary. This high attrition rate has many causes, but a primary factor is poor cash flow management.
Some founders simply miscalculate how much capital is required to get their business off the ground. Others are overly optimistic when forecasting key milestones (such as the date of first sale or break-even point). Still others allow the heady exuberance of a new project to go to their heads (and cheque book).
By following a few simple rules, you can stretch your dollar further and enhance your chances of success:
Value frugality.
Many founders believe it is important to present a ‘polished’ look to would-be investors. Professionalism and competence are imperative, but investors want assurance that every cent invested is going towards revenue-generating activities, not subsidising expensive office space or employee perks.
Never new when old will do.
There are few pieces of equipment that cannot be acquired second hand (PCs, office furniture, telephones, etc.). Never buy anything at full retail unless it is either mission critical (and a warranty or service agreement cannot be obtained otherwise) or no second hand market exists. The depreciation and other tax benefits of new equipment might appear attractive, but they’re of little use if you go bust before you can claim them!
Make time count (I).
Negotiate hard for the most generous payment terms you can achieve from suppliers. The longer you can delay payment, the better your cash flow. Be prepared to ‘sell’ your suppliers on your vision. As a new company, you will be perceived as a credit risk, so it may take some fancy footwork to convince them to both extend credit and stretch repayment timeframes.
Make time count (II).
Negotiate hard for the shortest payment terms you can achieve from customers. Faster payments make for smoother cash flow. Ideally, you should not extend credit at all to any but the most important customers.
Look for pre-payment.
If your proposed product is sufficiently compelling (for instance, if it offers dramatic cost reductions or other competitive advantage to customers) you may be able to secure partial or even full-payment before the product is finished, in return for preferential treatment at launch. Equally, a suitably motivated customer may be prepared to pay an advance in return for special customisations or accelerated development.
Align with the sales cycle.
It is important to have a thorough understanding of your key sales drivers. All resources should be wholly focussed on only those activities (product development, demonstrations, pilot trials, etc.) that will shorten the sales cycle or improve your sales ratios.
Park your ego.
There is no room for ego in business, especially when in start-up mode. Almost everyone finds it difficult to discuss money. Get over it – if you don’t ask for the discount, if you don’t push for the extra accommodation, if you won’t ask for the sale, you may as well set fire to your money.
One final word of advice: the 80/20 rule is alive and well with client prospecting. As cash reserves get lower, it is tempting to chase every potential sale. Yet 80 percent of time spent selling to prospective customers is wasted: they are either not interested, won’t buy from a start-up, aren’t convinced they need your product, are too early in the buying cycle, or intend to purchase elsewhere.
Aggressively evaluate your chances of success with each prospect, and be disciplined in deciding when to draw the line and move on to the next prospect.
Mark Neely is a lawyer, technology commercialisation consultant and author of 10 books, including The Business Internet Companion.
Other articles in this series:
Is your idea really an opportunity?
Attracting Capital: Are you ready?
