Tip #1: Avoid The Bank and Take Care of the Customer
We see it time and time again. A talented entrepreneur gets a fantastic idea that will change the world – one that is so revolutionary that, given a little funding, will alter human existence as we know it. These are the kind of entrepreneurs that we love. They have passion, intelligence, and drive that push them far beyond most people’s wildest dreams. Because we love these kinds of people so much, we hate to see them fail. When they do, it’s because they let the bank pay for their growth instead of the customer.
If you truly want more profit and cash flow in the bank, the first and dare we say golden rule, is to stop asking for money from banks, family, and the dentist next door. Instead, ask for money from your current or potential customers by providing more and better services or products. Ah ha! This is where you say, “Yeah but how can I sell anything if I don’t have enough money to start or to carry on?” That’s a very good question and the answer is that you have to become creative – you have to “create” your cash flow instead of ask for it.
For example, if you want to start a clothing store for women that will cost $500,000 – the bank probably won’t give you the money. Instead, you should open an Ebay store to sell your clothes, create a strong following in the social media circles, and use the money from those sales to increase your inventory, marketing, and operations as a whole.
This works if you’re an existing business as well. Instead of asking the bank for more money, thereby getting deeper and deeper into debt, ask your customers for more money, but give them something valuable in return. Your customers will fund the growth of your business. If you’re lazy and take the easy way out by asking for another loan, you’ll be a lazy entrepreneur down the road and when disaster strikes (which it will), you will not have a strong customer base helping to fund you through it. You’ll just have to ask for another loan which means more debt and despair.
Tip #2: Know Your Burn Rate and Runway
Imagine sitting by a barrel that has a fire burning inside of it. Next to you, you’ve brought a large wheelbarrow full of cash. In fact, that cash represents everything you’ve accumulated up to this point in your life. It may be $10,000 or it may by a million dollars. However much is in your wheelbarrow, image taking huge handfuls and duping it into the fire. That doesn’t sound like much fun to us, but it happens every day in almost every business and here’s why. Many business owners don’t know what their “burn rate” is.
Definition: Your burn rate is a measure of how much money you toss into the fire (your business) before your business starts generating a positive cash flow. Essentially, we’re measuring your negative cash flow. We know, it sounds morbid. An investor, lender, and you yourself should all ask your accountant what the burn rate for the business is if more money is to be put in. Your accountant may say $50,000. In essence, that means that you burn $50,000 a month trying to get to profitability.
Another term to understand is “runway”. It is a measure of how long you can burn money for before you go broke. Once the runway ends, you better have your plane in the air or else we’re going to need to call the paramedics. If you have $200,000 to start your business and your burn rate is $50,000, then it stands to reason that your “runway” is four months ($200,000 / $50,000 = 4 months). As a business owner, if you’re going to generate more cash and increase profits in your company, you’ll want to extend your runway as long as possible.
Small businesses need to understand the difference between profitability and cash flow. The problem here is that most accountants make it so darn hard to figure out for the entrepreneur. If you have a good accountant, sit down with him or her and have them walk your through it.
As an outsourced accounting service, we see so many people searching for more debt instead of applying the principles above. If you start your business, make sure to apply the above principles to come out on the right foot.