By Ed McLaughlin and Wyn Lydecker

In What I’m Still Learning About Managing Cash Flow from the New York Times’ You’re the Boss blog, Jay Goltz shares his experience as a small business owner with cash-flow management challenges. He describes with some chagrin his experience of having made a shortsighted financial choice that had repercussions a full nine years later. He finds himself unable to fix his cash flow problems with any of the conventional capital tools because his equity is entirely locked up. What sounded like a good deal in the moment had become a millstone around his neck. His final words ring very true:

“…pay attention to details, especially on loan documents. Don’t let someone else hold your equity hostage.”

The world is full of financial options, and new ones seem to come on scene every month. I personally espouse and promote bootstrapping, but the world of choices is vast. This is a good reminder to undertake some solid financial planning before  signing on the dotted line. One of the first questions an investor will ask is “How fast will you burn through your cash?” You need to be able to have a solid answer. Think about the “what ifs.” What if it takes much longer to reach positive cash flow? Will there be enough cushion to see your business through a hiccup?

The first company I founded, USI, generated positive cash flow within its first six months. We kept overhead to a minimum and, as a service business, had strong gross margins. The second business I started, Sigma Communications, had a quarterly cash drain of over $100,000. After three years, I decided it was time to pull the plug on Sigma.

Sigma was a unique real estate information company that published a high-end quarterly journal, The National Register of Commercial Real Estate. The centerpiece was a The Commercial Property Exchange, featuring surplus commercial real estate property listings, which were for sale, for lease, or for sublease.

While the publication met a real need in the market, our problem was how to make enough money by filling that need.  As countless publishers and online businesses have discovered, creating useful content and then making money from it through subscriptions, advertising, and fees does not always add up to a bankable business model.

Looking back, I realize that Sigma’s main business was manufacturing a product – not creating a source of information and bringing buyers and sellers together. Producing inventory and shipping it out on a regular basis – even in the form of a magazine – required a constant flow of cash and countless hours of direct and indirect manpower.

Some companies occupy the opposite end of the spectrum. A recent New York Times “Bits Blog” entry on Apple’s $159 billion cash hoard focused on the opportunities Apple is foregoing be keeping so much cash stashed overseas unused. Activist shareholders continue to complain.  Google and Facebook, on the other hand, are using their cash to make strategic acquisitions. The question posed in the blog was: Why isn’t Apple doing the same thing?

In the final analysis, cash flow is the life blood or your business. A company can run a deficit and stay alive. Ultimately, companies go bankrupt only when they run out of cash.

Ed McLaughlin is currently co-writing the book “The Purpose Is Profit: Secrets of a Successful Entrepreneur from Startup to Exit” with Wyn Lydecker and Paul McLaughlin.

 

Copyright © 2014 by Ed McLaughlin  All rights reserved.