Every start-up begins with enthusiasm and energy, but unfortunately, a business cannot survive on optimism alone. Having enough working capital is at the heart of successful firms. In fact, according to Bloomberg, eight out of 10 businesses fail during the first 18 months simply because they run out of cash.
Here are three strategies to implement to make sure your company does not suffer the same fate of running out of cash:
1. Fill Your Rainy Day Fund
This is obviously easier said than done, but having a well-stocked emergency fund for your business is crucial. The capital could come from venture capital, bank lines of credit, online financing websites or from other forms of creative fundraising, but set a goal – say four months’ worth of expenses – and search for financing until you reach that point. A small business is more susceptible to swings in the domestic or even local economy, and firms need to have reserves in order to survive.
2. Be Overly Conservative in Profitability Estimates
When starting your company it is important to be realistic about how long it will take to turn a profit. Depending on the type of business this can take many months or even a few years. Make a plan for how to cover the business expenses during this time. Once you have made your best guess at when your firm will become profitable, double it just to be safe because often unforeseeable circumstances will occur that slow your estimates and you don’t want to be scrambling for money when people are least likely to lend it.
3. Stretch Your Employees Before Hiring More
As a business grows, the desire to hire more staff may seem more like a necessity, but think again before sending out the job postings. Examine your firm’s growth path and determine if the amount of growth truly dictates more hiring. In the beginning, all employees, including the owner, will probably feel the pain of being stretched thin in order to handle all the responsibilities, but it is much better to have that kind of pain than the pain of having to lay off employees after realizing your business cannot afford them.
4. Be Lean & Mean
It entails working efficiently and simply utilizing what is required in order to compete successfully. Companies that have made it through the crisis will be lean and mean. An increase in the efficiency of machines, labor and capital may lead to the use of optimal resources. The cost-cutting approach is always primary in business processes but the estimation of savings over the long run versus the marginal return from the sales must be assessed clearly.