Lean, Mean Cash Flow Machine: Startup On A Shoestring - Part 3 of 6
REVENUE IS VANITY. MARGIN IS SANITY. CASH IS KING!
Truer words have never been spoken. My Dad, a lifelong entrepreneur used to kick around the above phrase like it was going out of style (and my guess is that he probably still does, I just don’t see him every day to hear it!) Heck, he even had signs made with these affirmations written in big, bold letters.
As I blaze my own entrepreneurial trail, I want to slip in a quick "thanks" to my Old Man. He is my mentor and sounding board, and without him I don't think my path would have been the same.
My third tip in 5 Tips To Starting A Business On A Shoestring Budget is: “Turn your company into a lean, mean cash flow machine.”
So back to it...
Revenue is vanity. Margin is sanity. Cash is king!
Revenue, without cash flow, is simply that: vanity. Although so many people in the business world measure success in terms of revenue, you would be remiss to think simply more revenue translates to more cash. What if you sold $100 worth of straw? Sounds good right? Not if it cost you $110! Context is key!
Profit margin can be deceiving, too. Say this time you sold $100 worth of sticks, and now your cost is only $50. A 50% profit margin! Awesome, right!? Well, sort of…but what happens if your customer waits to pay you for 6 months? That means that there is still no money (read: CASH) to pay the bills!
Cash is king. Cash is king! CASH IS KING!
Cash flow is the reality of your business. On the simplest level, cash flow is the movement of money coming into your business less the money going out of your business. It is a more dynamic measurable than the other two because it factors in the timing of the movement of the money.
This time, you sold $100 worth of bricks, with a cost of $50. You then negotiated terms with your "brick guy" to pay him in 30 days. Meanwhile, you deliver the bricks to your customer, who pays upon receipt. Now you have $100 cash in hand, with 30 days left to pay your $50 invoice. Now go sell more bricks, continue to bring in cash faster than it goes out, and create more and more runway for your business. Soon enough you'll have enough runway to take off!
Companies that cash flow positive on a regular basis have the capacity to reinvest and spark growth. Companies that don’t, can’t.
Now it’s time for you to get lean.
If you’re truly launching your startup on a shoestring budget, you need to prioritize. Big time.
What is important? Where do you make your money? What is your focus? Are you focused on the right thing?
Asking yourself these questions will help you to avoid “spinning your wheels”. If you can be clear and concise about your goals, you’ll be surprised how clear and concise your decisions, and thus, actions will become thereafter.
A lack of focus typically ends with a lack of accomplishment. Without a plan, money will get wasted on the wrong things. So spend effectively and efficiently.
It goes without saying (hopefully) that cushy leather chairs, waterfront views, and a company leased Mercedes are out of the question (for now)!
Your team needs to be lean, too.
At the early stages, find people with multiple skills who can wear various hats. Find an office manager with graphic design skills, an assistant who has a bookkeeping background, or a manager who happens to double as the office handy man. You get the point. Utilize any and all skill sets!
There is a time that this will change and specialization will be key, but agility and flexibility within your team is key in the beginning.
And don’t forget to be mean!
You don’t actually have to be “mean” like a bully, haha. Think: Tenacious and Persistent.
Make sure that your company can sustain a high level of effort and production to drive sales and execute work. But a lot of startups fail to put the same emphasis on collecting money owed. This is where cash flow comes back into play.
If you can’t collect the cash to pay your bills and reinvest for growth, you will fail.
At the end of the day, if you sell a lot, execute a lot, and put more money into your business than it spends on a regular basis, you’ll be just fine.
Don’t forget though, it’s all about timing!
DOWNLOAD THE STARTUP ON A SHOESTRING
Please let me know your thoughts in the comments section below. Thanks!
This article, Lean, Mean Cash Flow Machine is part three of my six part Startup On A Shoestring series.
Part one, 5 Tips To Starting A Business On A Shoestring Budget can be found HERE.
Part six, The Startup Scene Is The New Wild West. Be A Gunslinger can be found HERE.
For more tips, follow Nicolas China on Twitter @Nico_C7.