The idea of entrepreneurship and the real-life, day-to-day
experiences of entrepreneurship are two vastly different things. In my
first serious venture our team raised $250,000 for an online financial
technology start up, which was focused on educating and assisting
investors to develop asset-management strategies to self-manage their
own capital in various financial markets.
Our business model was strong. The company had several key revenue
streams and after nine months of pre-launch development and another nine
months of post-launch operations, the company finally began to make
money. Then, for an additional six months the company largely broke
even. And, finally, after 24 months, the company began to make enough
money to make the venture worthwhile.
Through the life of our company, our team learned many lessons, but
one has stuck above most. A successful entrepreneur is characterised by
many attributes, but ability to manage risk is key. Most people never
even consider this aspect of business, but the ability to actively
manage risk is often the difference between entrepreneurs who have a
great idea and entrepreneurs who actually build successful companies.
The greatest risk
The single greatest risk for any entrepreneur is running out of cash.
A business fails when it runs out of cash or available credit. If a
business spends more than it makes per month, that burn rate will
eventually cause the business to fail once all cash is spent and
available credit is used up.
Therefore, every entrepreneur should be fixated on controlling costs
and managing this risk. Let’s discuss a few key points that will empower
aspiring entrepreneurs to successfully manage the risk of cash flow.
Cut out the non-necessities
When starting a business it can be tempting to spend money on
non-essentials, such as nice office space, beautiful office furniture,
expensive computers, administrative staff, etc. This is a black hole of
lost cash, however. Until a business is generating healthy net-positive
monthly returns, it is wisest to keep in “bootstrap mode”. The only
money spent should be what is absolutely necessary to create the
business’s product or service and take it to market. Bootstrap mode may
not be the most fun experience, but it’s necessary and often means the
difference between a business idea and an actual business.
Know your burn rate
A second temptation many entrepreneurs face is to ignore the numbers.
“If I just keep my head down and keep moving forward, we’ll make it.
The numbers are depressing, so I don’t need to look at them.” This is
disastrous. As a business owner and leader, one should always have a
direct pulse on the cash position of your business and how cash is
flowing in and out of it. One of the most important numbers is the burn
rate. This is the amount of money you are losing each month.
If you divide your cash reserves by the burn rate, you’ll get the
maximum number of months the business can survive at its current
trajectory. Know this figure at all times, and be proactive about
cutting costs to extend the lifeline of the business.
Entrepreneurship is a great challenge. Put yourself in a position of
power by taking a proactive stance toward active risk management and
seek to manage your cash risk by consistently keeping expenses low
during the early stages of your company’s growth.
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