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Running out of cash in a startup is called “burn”. This is the number one reason many small businesses fail. Some startups receive millions of dollars to fund their great new business idea and many fund their own enterprises. They convince investors to fund them or if they fund themselves convince themselves and everyone involved that “the road to success is at hand.” The business plan even predicts success. However, when the owners actually begin operations, they see that big sum of money(or not so big sum of money) and immediately begin spending it and here lies the problem. Of course, you know, many things can happen to make the best laid plans fail but let’s look at some of the money management problems.
1. Lack of commitment to a financial plan.
Unfortunately, many new owners take the time to project expenses in their but they were not committed to it. Careful adherence to the plan is needed with adjustments made overtime. Instead, the owners may rent expensive offices, buy new shiny equipment and go to conferences in their discipline, just to name a few wasteful practices.
2. Not knowing the difference between a useful expense and a wasteful expense.
There are some real basic problems here. There are some fundamental problems here. The owners are not guided by established Mission, Values, Vision or Management Strategy. Business targets and operation standards are critical to conserving and not wasting money in any business. The business plan was general, but the owners must to design and stick to operational procedures and targets and this includes a financial system. Considering carefully what you really need opposed to what you want helps prevent waste.
See “The Harsh Truth about Startup Burn Rates” Helaine Olen
3. Confusing gross income with net income.
This is simply not knowing how much money you spent and how much money comes into the business. This is a simple concept, but it is often overlooked because of the hustle and bustle of everyday activities, particularly when you are a sole owner or you have just two or three affiliates. There is very little time for administrative concerns; but let me tell you. If you want to survive and grow your business, you must think like a manager, not just the technical expert. A manager designs and controls his or her business.
See also “Prevent These Destructive Burn Rate Issues in Your Small Business.”
4. Not committing to holding and growing cash reserves.
You can use a professional accountant or business accounting software. Be sure to use some dependable System for carefully managing your money. Whatever you use, make sure you (the owner) understand and keep up with “every penny”. This is the only way you will know when you have cash reserves and how they are growing. Cash reserves are the net income that you collect after you have subtracted all of your business expenses. Determine for yourself, how much cash reserves you want to keep for emergency or growth. Set the goals and stick to them. You can reserve cash in many ways. You can buy things only when needed and commit to getting the best price possible. Buy used equipment, use free software from the internet, use volunteer workers and other money savers.
“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” Warren Buffet
Successful business ownership requires the use of Best Management Practices. Management skills are critical to designing, sustaining, fortifying and duplicating your business. Learn them in the most efficient way you can; then apply them. You will avoid being one of the many failed small businesses.
See ”20 Directives for Small Business Success: Do or Die”
