July 28, 2015
Sadly, ’tis the season. The season for businesses that started full of enthusiasm and vigor in the Spring to be shutting their doors come mid-late Summer. This happens every year but this year in particular seems bad and, sadly, it always comes down to one of two main problems.
In the last month I’ve noticed five small businesses close up shop. These were businesses that were just getting started and already the paper is going back up in the storefront (it’s almost always those with storefronts or other high operating costs…see more below). It tears me apart to see the dog-eat-dog world of business truly eat those entrepreneurs because I know it’s not just the entrepreneurs’ finances that have taken a hit but also their self-esteem. And that’s just crushing.
But I can’t help but shake my head every time it happens because when you talk with the former owners, the problem usually stems from either one or both of the following:
1. Not delivering a product or service the customers actually want/need. This is all about understanding your target market and creating a business that caters to them and their needs. I’ve talked about this a ton on this site (and probably will talk about it even more in the future) so I won’t dwell on this point today.
2. Not having enough of a cash runway. By this, I mean, the entrepreneur hasn’t budgeted enough in cash reserves to cover their fixed costs. They assume that once the business starts operating they’ll start making money. And while you hopefully will have sales and start making money, oftentimes, in the beginning, it’s not yet enough money to cover your overhead and other aspects of running your business.
This is where the cash runway comes into play. Just like you aim to have a personal cash safety net, you should plan to have a business cash safety net as well. Ideally this is enough cash to cover your overhead for several months in case the sales don’t come in as quickly as you anticipated. This gives you the runway to spend the time getting your business off the ground and making the right long-term decisions for your business rather than spending every minute scrambling for every single dollar that may come your way.
How much cash is enough? That really depends on your business model? Just like the bigger the plane, the longer the runway; so too with businesses. If your business has high overhead expenses and operating costs then you need to have more cash on hand to tap into. If, on the other hand, you’re running a smaller-scale business (at least to start – remember, you can always grow!) then you may not need as much in reserves.
Don’t skimp on this step. It’s easy to underestimate expenses and overestimate sales when we’re excited about a business idea. By making sure you have enough cash, you’re giving your business the time it needs to really flourish and grow.