I sometimes consult Startups or better: I discuss with young leaders about their issues while running and growing their companies.
Sometimes, I do this for free simply because I cannot look away when obvious things go wrong, sometimes I do it for money with a more intense engagement.
From these experiences over the last 25 years, some of them from my own companies, I want to tell a story to explain what I experienced at least 30 times.
Business is growing
In the best case scenario the Startup does what the name says. It starts and goes up. With a good idea and the right market, chances are not too bad to feed at least some people and allow the company to grow.
In this phase, the opportunity pipeline is often growing faster than the ability to fulfil customer needs.
So attention on controlling starts dimming because you have to focus on results and the total revenue is anyway rising all the time.
Business is still growing
If your business is growing, you don`t know HOW MUCH it will be growing in the next 3-5 years. But with your ambitious plannings for hiring new people, growing your office and becoming more attractive for your cool employees, you tend to contract bigger than you can afford.
In this phase, in expectation for future growth, Startups often take fatal decisions. They contract offices too big, too fancy and too expensive. All of which means, that they raise cost to a level they plan to be able to cover in the future.
But an even worse decision is to invest in assets and property when your company is still in a young growth phase. Banks will probably recommend you to do so. Because from their perspective, they invest in security. Bt believe me, you only cut liquidity and freedom with investments in property in that phase.
Where to get the money?
If you don’t have a venture backup, you probably don’t have no money to invest in the future. You are living from hand to mouth.
As you believe in your future, you will have to ask someone for money. I recommend not to ask your family until they have tons of free money.
So ask your bank for a loan, they will ask for some financial details and a plan. And thanks to your bank, you are temporarily re-focused on controlling.
Set under pressure, you make the plan, deliver it to the bank and get your money assuming that you made a good job with your controlling sheet.
After the bank delivers, your controlling awareness dims out in the same second.
You are not even aware that you did not make the controlling sheet for the bank. You made it for yourself!
When the pipeline drops
Now, with everything for growth in place, with a new office and more people aboard, you find out that it takes efforts to keep the opportunity pipeline big enough to feed all the people and to pay all the bills. And productivity starts decreasing at frightening speed.
This is the phase for every Startup where things become critical. You must keep your eyes on too many things in parallel. And a small disturbance in your ability to close deals can kill you in a very short time.
This is mostly the phase when Startups ask me for advice. And it is not seldom that the guys come to me when it is almost too late.
Summer is a dangerous time
I have no concrete numbers or statistics, but I am sure that a lot of bancruptcies have been prepared between December and May and have been triggered during July until September.
Summer is the phase, when employees at your customers take their holidays. When executives postpone decisions. When nothing new is getting started. When running projects fall asleep.
All this means: You won’t get paid.
As a Startup you typically have no money and not sufficient influence or experience to drive deal closures when you NEED TO BRIDGE such a phase.
My first important tip:
Don’t lend money shortly before summer. Don’t move to bigger offices until you are pretty sure that you will survive the BIG SUMMER HOLE according to your project pipeline.
Typical opening questions and the most annoying Startup answers
My first questions in such critical phases of companies are always dedicated to liquidity. I ask the business owners simple questions like
- How big is your closed deals pipeline over the next 12 months?
- How big is your opportunity pipeline in the phase of “negotiating” the next 6 months?
- What is your fixed cost block every month?
- What is the general expense per head every month?
- What is staff cost every month?
- How productive have your employees been in the last 12 months per month (cost/revenue)
- Which of your employees are inevitable to survive?
- Which of your projects/products REALLY deliver earnings?
And what do you think that most of these guys answer?
Most of them annoy me with..
I don`t know exactly, I have to check out and prepare these figures. Will deliver this tonight or tomorrow morning..
Who is annoyed by this answer?
Well. First of all, I am. Because this fault is so stupid!
But most often the entrepreneur is annoyed by himself when he or she realizes, that a trivial task has never been done right: Proper liquidity management.
Knowing your current liquidity status and to REALLY understand why it is as it is, is the most important thing for any entrepreneur.
The death of your company can be prepared in several ways, but it will die for sure, if liquidity is running short.
Liquidity is the heartbeat of every company and all measures taken in a healthy company are dedicated to the ability to pay bills over a period of a minimum of 3 months in forecast.
My second important tip:
Do not invest in fixed assets until you are able to pay your expected bills for a period of 6 month with your own liquidity. Not your banks liquidity.
Startups out there: I appreciate your enthusiasm.
But I ask you to dedicate a very small part of your genious in creating AND MAINTAINING an ALWAYS current liquidity sheet.
My third important tip:
Know all the answers about your figures at any time. Be ready to pick out your liquidity sheet to constitute WHY your company is stable and liquidity safe.
If you are able to run your company over a period of 6 or more months without gaining a cent, your company starts becoming stable.
If you follow these small hints, you can ask me more clever questions than “what shall we do now to survive?”.