We spend a lot of time here at the Unchained Entrepreneur focusing on how to start and grow companies, as well as strategies for achieving person success. There is a dark underbelly to growing a company, however. The life of an entrepreneur is not always one of joy and unbounded enthusiasm. Today let’s examine what to do about one of the most dreadful entrepreneurial situations – burning through cash reserves.
One of the most stressful times in the life of an entrepreneur is when your company begins to run out of funds. Perhaps you overestimated how quickly your product would come to market? Or maybe a key supplier/manufacturer overpromised on delivery times? Perhaps the general economic malaise played havoc with your plans? Whatever the reason, many of us have been in the circumstances where our business was threatened due to the steady drain of capital.
There’s no magic bullet for this situation, and I’m not going to pretend that a blog can possibly solve your particular circumstances. Instead, I want to focus on strategies that you can employ that can keep your emotional state healthy and may also keep your business afloat. If stress becomes overwhelming, you won’t be in any shape to search for solutions. Thus, you can use some or all of the following tips to keep yourself on an even keel, allowing you to continue the battle for business survival and success.
Don’t Lose Track of Success
Just because your business has run into difficulties doesn’t mean it’s a failure. Take some time and review all the successes that you and the company have achieved since startup. Actually sit down and make a list of these accomplishments. Have you launched a product? Garnered any awards? Raised initial angel or VC funds? The list of milestones could be much larger than you think.
About ten years ago, a company I co-founded (Sneakers.com) ran into some financing difficulties. I sat down and made a list of milestones that had been achieved – securing the Vice Chairman of the North Face for our Board of Directors, hiring the former Chief Merchandising Officer of the Sports Authority as President of the company, raising several million dollars of initial angel funding and launching a super designed and functional website were on that list. As I reviewed these, I realized how much the company had already accomplished. Lack of financing was just another obstacle – and we’d already overcome a number of obstacles to get to where we were.
By the way, this list can prove to be an effective tool beyond your own state of mind. Share this with employees, vendors or suppliers that express concern about your circumstances (see below). You may find that it gives them comfort. Additionally, you should be using this as a tool in any attempt to raise additional capital.
Control what you can.
In any business or personal circumstance, there are elements that remain under your control. Identify what these are. Once you have a list of items that you can control, spend some time focusing on these. Often, these will be small and mundane in nature: aggressively collecting receivables, managing communication with your direct reports, deciding to eat more healthy lunches (seriously!), etc.
It may seem trite or even nonsensical, but this strategy can ease your burden. Right now, a large component of your stress is related to your inability to control the situation. By focusing on elements that you can control, you bring a measure of comfort and self-reliance back into your life. Believe me, your psyche will benefit.
Cut 25% of your costs.
When you first realize that you are in trouble, it’s time to do some analysis. To begin with, you’ve got to honestly figure out how much time you have left if conditions don’t improve. If somehow things have crept up on you and the amount of operating time you have left is less than 3 months, then I’d say you can ignore cutting costs and focus on the other strategies. Otherwise, if you can lop off 25% – 33% of your expense load, you will extend the life of your company – and that time might prove the difference between success and failure.
This is not the place for a comprehensive primer on expense management, but consider the following tips:
Call up every major competitor to your vendors and say you are considering switching providers. Tell them that if they were to offer six months of free service, you’d be willing to switch. Then be prepared for negotiation and see where that takes you.
Here is a quick (admittedly emotionless sounding) 3 step process for cutting your staffing costs:
- Cut non-core staff first. Examine your PR, marketing (NOT sales) and administrative positions and see if you can consolidate or eliminate. See if some of these folks can work for you on a part-time basis.
- Examine high priced salaries. If you’ve been around for awhile, it’s likely that you hired senior staff members when the economy was in better shape. Research the current labor market and determine if you could hire a qualified individual for the job position at a lower salary cost.
- Offer or Eliminate. Take the results of your research to each of your senior staff members and explain the situation. Ask them if they would be willing to take a reduction in their salaries – perhaps for a specific period of time. If they demur, you will need to be prepared to immediately initiate the process of replacing them, in order to achieve the cost reduction. By the way, some entrepreneurs are unwilling to do this. They feel that even when employees voluntarily reduce salary, they are left with unhappy staff. It’s your call as to how best to manage the combined problem of morale and rapidly draining cash flow.
Cost cutting is a nasty process. When negotiating with landlords or vendors or laying off employees, you’re going to feel bad. However, you’ll likely discover that the end result (regardless of the specific financial effect) is to dramatically lighten your stress load. Once again, you’ve taken action and asserted control in a situation that makes you feel helpless. These cost cutting strategies have a double effect – good for the business and good for your (eventual) emotional health.
The heart of any successful business is sales. Although it’s difficult, lack of capital can be solved by growth. In most capital constraint situations, a 30% increase in sales is all that stands between you and ultimate success. And a hard-core press for revenues can lead to dramatic improvements in morale – for both you and your staff. Break this down into two components:
These tips barely scratch the surface of coping with the situation. I hope that you’ll find them useful if you are in, or ever find yourself in, these circumstances. If you’ve been here before, I know the Unchained Entrepreneur community would love to hear your war stories and other tips for dealing with this scenario.
One final thought for you…Remember that even if you actually have to shutter your business, you’ve still achieved a great deal. You’ve taken a shot at starting and building a business and learned (hopefully) some valuable lessons along the way. Here’s a little secret – many financing sources prefer to work with an entrepreneur that’s failed vs. a completely new entrant. Your history in starting and running your own venture, even though it didn’t work out, is a valuable currency. When you’re ready, pick yourself up and get back into the game.