The most important element you must include in your business planning is determining the amount of funding that will be required to get your business organized, launched and growing. The most common mistake that entrepreneurs make is running out of that ever-precious commodity – cash.
WHY IS THIS A PROBLEM?
· Having inadequate funds for your start-up is the #1 reason that start-ups fail.
· Underestimating the amount of time and money required to reach “cash flow positive,” that is the point at which the business is generating cash through sales.
· Not managing cash flow correctly, that is underestimating when revenues will be received and bills are to be paid.
HOW CAN WE AVOID THIS PROBLEM?
· Follow the 2X to 3X rule. As a founder, we frequently adopt what we consider “conservative” forecasts and plan accordingly. More often than not, we find ourselves coming up short. The 2X to 3X rule says that we should plan for any activity to take 2 – 3 times as long to complete and cost 2 – 3 times as much as we originally thought. This will provide a cushion to increase your odds of success.
· Be sure you have enough cash to reach the next stage or milestone. Be sure you have a mechanism in place to provide the fuel (i.e. cash) to propel you forward toward your next developmental milestone indicated in your business plan.
· Spend cash wisely. Smart managers always appreciate how hard it is to obtain cash, so it is essential to spend it wisely. When we practice the technique called “bootstrapping,” we will make cash king. Bootstrapping is a very short term technique used in the early cash-starved weeks (perhaps months) of our start-up. We will manage for cash flow – not “paper” profits, growth, market share, or branding. We will get our product or service into the market as quickly as possible to begin generating cash (see the blog post “Having a Product That is Never “Ready” for Market”)
· Always know from where the next “tranche” will come. When committed, investors will provide funding in segments over time, called tranches. They will be monitoring your progress against milestones you have outlined in your business plan. This will provide you with a level of confidence that funding will be available as you meet – or exceed – your milestones.
Avoid the #1 reason that start-ups fail. Use every available source of funding and these techniques to ensure the success of your business.