Being Undercapitalizing
the Business
Maybe you
should've waited to order that red Ferrari after all...
When we
review business plans for start-ups, cash is often estimated to flow in 3
months or even less. The reality is often somewhat different; we often find
that real cash flow doesn’t start until 6, or even 9 months after starting the
business. Obviously for retail businesses this would not apply, but if services
and goods are being applied, then our standard rule of thumb is to double the
period that the new owner is predicting for the commencement of regular cash flow.
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| Tansformanceinc |
If new
entrepreneurs grossly underestimate the amount of time and capital necessary to
reach cash flow breakeven, it causes many promising ventures to shut down
prematurely. Be conservative with your financial projections and plan on having
adequate funds when you launch to cover all sunk costs (including startup
losses) until your company becomes cash flow positive.
It means
that apart from the business costs, you also need to cover your personal
expenditures such as mortgages, loans, every day living expenses and so on.
If you
don't have enough savings to cover the required investment, it may be tempting
to launch your startup under the assumption that you will be able to obtain
additional funding at a later date. While staging investment has advantages
(preserving the option to abandon, higher valuation and—therefore—less
dilution, etc.), this strategy can backfire and leave you unable to get cash
when you need it most or force you to negotiate with banks and investors from a
position of weakness. It's often better to change the business model to bring
required investment in line with available resources.
The moral is clear, unless you have a very generous
benefactor to bankroll you through the cash flow weakness in start-up it is
probably best to avoid extravagant expenditure on vanities – so hold off
ordering the red Ferrari company car.
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| Transformanceinc |
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