Startups run out of cash in two phases: when hatching the idea and the actual sustaining of the idea. That is, while you may have had a superb idea, you just couldn’t raise enough money to fund it. So, the business died before it even began, like a still birth. In the latter case, you were able to get the business started but you ran out of money needed to keep the business afloat. This may occur anytime with the lifespan of the business – first month, six months in, two years later – typically within the first five years. As over 85% of startups do not make it pass the first five years; and running out of money accounts for the second top reason.
With that said, we would look through why startups tend to run out of cash and what you can do to save yourself and business from this.
One way we run out of cash is when it becomes difficult to keep the business afloat. Several reasons accounts for this including poor business practices, misappropriation of funds, embezzlement/fraud, etc.
Poor Business Practices
There are several items here. One of which is where expenses is more than income. Well, at times it may make some sense when such expenses are for marketing, promotion and publicity. In the view that once the sales is made, the deficits would be covered. However, where this deficit occurs over a relatively long period, it may ensue in bankruptcy.
Another poor business practice is making transactions that could result in keeping cash away from your hand over an extend period such as giving credits, cash advances, making bulk purchase for goods you would not use imminently, etc. While each of these by itself may not be a bad idea, but at times, they could be loopholes that could make you trip and even fall out of business. Giving goods on credit may be good but sometimes may result in bad debts. You only should give credit as much as you can forfeit and not suffer loss should it result in bad debt.
Also, not keeping proper financial records is a poor business practice. Write your account on paper for income/expenses, assets/liability, budgets, forecast, sales report etc.
Misappropriation of Funds
This is another reason we may run out if cash. For instance, when we buy more liabilities than assets, pay for things that make us look ‘big’ when we are not, put funds/resources meant for one thing into another, poorly prioritizing of budget and so on. More so, where you don’t keep clear boundary between personal and business cash, income and expenses, you are liable to spend business money on personal needs and soon there’s no money for business needs.
When you or any other member(s) of the company fraudulently spend the business resources on personal gratification, soon, the business is heading for doomsday. With proper documentation and control, this could be curtailed.
On the other hand, for when you are trying to hatch your idea, two strong reasons abound for running out of cash: Miscalculated required amount and inability to raise the required cash.
1. Miscalculated required amount
This is one very grave mistake we make in the euphoria of having a bright ‘unstoppable’ idea. The business idea(s) seem to be without imitation and bound to succeed. Does this feeling seem familiar? Well, the truth is, with this feeling we leave out certain things. We play down on something or label some things as unnecessary. At times this may be deliberate, other times, an oversight. Whichever way, the consequences are detrimental and could cost you your entire investment. That’s why proper attention should be paid to writing your business plan and feasibility study. Writing helps clarify things better than examining it mentally.
While we may fear someone stealing our idea, it makes sense to share your idea with others and getting their input and perspective. As it is said, two good heads are better than one. You may get them to sign confidentiality, but it is good you ask and get other perspective. This may save your so much misery than I can here explain.
Also, while we fear spending too much time in planning and may want to go on and execute the idea remember, proper prior planning prevents poor performance. More so, haste makes waste. As the wise saying goes, it is better to measure nine times and cut once, than measuring once and trying to cut nine times. Sit down and count your cost properly – that’s wisdom.
2. Shortage of Cash
Sometimes, you made proper plans but are not able to raise enough cash to the require amount and there is no way out except you have the cash. That could be so sad: seeing your idea and, or investments go because you’re unable to pump in the so needed funds. I’ve been here, and must confess it wasn’t pleasant.
In the succeeding post, we will go on to explain what you could do in cases as this. Some may sound unconventional; but be assured they’ve all been tried and found to work. So, go on to read and see which one suits your circumstance.