Want a glimpse into the psyche of a startup founder? A survey by Silicon Valley Business Journal found that 25 percent of early-stage founders surveyed believed that if their businesses failed, that outcome would most likely be because of one factor: no cash flow.
That suspicion isn’t unfounded: According to Smallbiztrends.com, more than 50 percent of small businesses fail within the first four years, due mostly to cash-flow problems. Entrepreneurs aren’t just irrationally afraid their funding will dry up — they’re seeing it affect their colleagues in droves.
Look, ideas on their own are great, right? They’re business in its purest form — unsullied by compromise, unnecessary input or cynicism. But they still need lots of things, chief among them money, to prosper. Funding keeps the dream alive, and the act of budgeting that seed money is the key to helping that pure idea blossom into everything you want it to be.
I’ve worked with entrepreneurs and have been one myself for more than a decade, but there’s one lesson that even the most nascent business owner knows: The economics of starting a business get complicated quickly. However, once you understand your cash requirements, you can confidently take the leap and turn your big idea into something viable — without breaking the bank.
The best surprise is no surprise. You’ll want to map out your business in as much detail as possible, thoroughly uncovering all revenue streams and costs, to produce a forward-looking cash-flow statement and balance sheet. A good plan will be comprehensive and strike the right balance between optimism and pessimism.
The more research you do, the more prepared you’ll be when, invariably, something changes that positively or negatively affects your cash requirements. A good business model includes estimates of how much money you’ll need at various stages and helps you avoid landmines, especially if you keep it updated with current market realities. If you’ve already started a business but never undertaken this exercise, don’t wait.
Unsecured money is harder to raise, and investors will be interested in opportunities for which the risk has been mitigated. Convert as many unknowns into knowns as quickly as possible, with real-world representative data. After developing your business model, create a working prototype or minimum viable product to confirm product-market fit and knock down a few barriers in the process.
The availability of cash and the level of operational risk will have a dramatic impact on every level of your business, whether that level means an everyday task or a long-term prospect. Don’t spend yourself out of startup survival. Try these cost-cutting practices to keep your small business above the surface:
1. Figure out funding choices.
Once you’ve established solvency, know that timing is everything. Friends, family, crowdfunding, angel investors and venture capital are just a few means founders use to raise dough; knowing when and how much of an investment you’ll need is key to launching your business successfully.
Your ability to raise funds when you need them will be dependent on risk versus market opportunity. When you secure an investment against an asset, there is obviously less risk for the investor.
Properly explore all scenarios — positive and negative — and set clear KPIs within your model. This keeps you ahead of your cash without needing investors, which improves your leverage when it comes time to raise money.
2. Look outside.
A Businessweek magazine study found that by using contractors, employers can cut costs by 30 percent; this practice helps companies avoid expenses like benefits, payroll tax and vacation time, and using contractors makes it much easier for you to scale or scale back the amount of time that those people work.
Hiring contractors also gives you flexibility that you’d lose by committing to a full-time team member. New hires further require time to develop their talents and probably won’t add value until they’ve been around for six months or more. Contractors, on the other hand, will be experts in their niches and can get to work right away.
3. Offer something extra.
Wanting to decorate Facebook’s walls in its fiscally tight early days, Mark Zuckerberg asked muralist David Choe to work on good faith. Instead of a traditional salary, Zuckerberg offered Choe equity in the company, which Choe was free to cash at any time. In 2012, Choe did just that — gaining $200 million in the process.
Though Choe wasn’t a full-time worker at Facebook, an equity plan is a strategy that startup founders shouldn’t dismiss. “Paying” team members in this way preserves cash on payroll and shares the upside. It’s essentially the same as someone making an investment into the company for cash, but instead investing in the form of a decrease in salary.
4. Listen to the market.
As big a proponent as I am for having a plan and sticking to it, the market couldn’t care less about that when it’s ready to move elsewhere. I started a business called Roozt.com, which aimed to become the Amazon for socially conscious brands looking to sell their wares.
As we built the platform, our yoga vertical’s growth became noteworthy and accounted for 90 percent of all revenue — so much so that we were approached about dealing exclusively in that segment. After talking it out, my investors and I declined to go exclusive on yoga because that had not been the original plan of the business. Needless to say, Roozt didn’t become what we wanted it to be, and not pivoting was a big factor in our having to sell the company prematurely.
So, learn the lesson implied here: Based on the money you’ve raised, change your pro forma projections (projected cash flow) and growth to fit this financing. With a new strategy, you may find a quicker way to profitability, which many businesses today undervalue.
5. Do more with less.
Consider this: Startups that share a co-working space are four times more likely to succeed than those that don’t.
If money is tight, look at your office rent expense. Reducing it can involve moving or downsizing, or evening adopting a virtual office or shared space. The latter not only reduces operating costs, but also helps you interact with other small business owners and employees with various talents and specialties. Remote work, which is another option, affords a business tax deduction if part of that home is used primarily for running a business.
Even if you have a detailed financial business model and have an eye toward reducing costs, it’s important to have a solid “Plan B.” Some planning against negative scenarios goes a long way in mentally preparing you before you’re forced to face the circumstances head-on. Options typically include boosting revenue at a lesser margin, followed by various degrees of cost-cutting and, finally, “doomsday” planning to pivot, sell or liquidate.
The more time you put into creating a comprehensive business model, the easier it will be to react and adjust your course, as needed. Moreover, moving quickly and decisively with a well-thought-out plan B could make all the difference in your eventual business success.