NO. 2 REASONS STARTUPS FAIL: THEY RUN OUT OF CASH (Part 3)

So far we’ve seen why and how business run out of cash as well as how to avert them. In this concluding part, we’ll two final tools: Power of negotiation and short positioning.

POWER Of NEGOTIATION
The terms of payment can be more important than the price in a negotiation so much so that you can agree to almost any price if you can decide the terms.

If you are negotiating and you really want to purchase the item, or sell it for that matter, and the price is the sticking point, shift the focus of your discussion to the terms and see if you can’t negotiate. Even a bad offer can be turned into a good deal for you if you can dictate the terms of payment.

The more you can extend the actual payment of money as far into the future as possible, the better. Any delay or deferment of payment – especially if you can arrange for no penalty for prepayment – increases the attractiveness of the deal by lowering the cash outlay in the present. (See more on negotiation on our earlier post.)

Let’s see some example of this. Let’s say you see a nice car selling for a discounted price of 25% but the offer ends by tomorrow – after which the price reverts back to 4 million. You like the car, but have no money. By this principle you can still enter into the deal should you know how to negotiate for a better term. One way to do this is by using the ‘lay away’ method.

The car owner or agent, wanting to preserve the sale, may create for you a layaway plan. Putting your sincerity on the line, they will put the particular car on reserve so no one else can get it, as long as you return within 30 days to pay for it in full at the discounted price of 3 million. When you pay for it, then you are free to take it.” As proof of this arrangement, the agent gives a slip of paper with the store’s name, the agent’s name, the terms of the layaway agreement, and his signature.

Two possible ways to take advantage of this situation came into mind:
* You could go into the store, buy the car for 3 million, and then turn around and sell it to someone else for 4 million.
* You could sell your layaway slip for 4 million

Both scenarios would result in pocketing 1 million. But the first one would also require that you use 3 million of your own money to get the car out of layaway. This type of an investment profit is called a capital gain. And it’s the approach which follows the “it takes money to make money” path. When we talk about investing, this is how most people think.

However, when we revisit this example, remember that we didn’t buy anything. All we did was enter into an agreement with someone else. And this agreement costs us no money. We asked, and the store clerk gave it to us. Instead of requiring money, all we needed was a simple negotiation. When we negotiated this deal with the store clerk, we received leverage with no debt. The layaway agreement gave us flexibility to decide if it was valuable enough for us to take action. It didn’t require any money from us—either from our own account or from a loan.

If you have no money, the answer is simple. But what if you have 3 million that you are willing to invest in the deal? Does that change the way you would approach this investment opportunity?

It might be very exciting for you to discover that in real life there are deals you can do that don’t require you to buy anything.

Our next illustration of this principle of negotiation comes from my personal experience. Starting the farming business with almost no money and little experience, and equipment. By applying this strategy of negotiating the terms, I made a deal with an older farmer who gave me seeds and farm hands to work on my farm all through the planting season. In return, I’ll pay them at the end of the harvest with additional 15% of the seed I collected and the wages for the farm hands. I also included a clause that if they didn’t work well and the harvest failed as a result, I’m not liable to paying the extra. The deal made sense to me. I had nothing to lose – my return on investment was infinite!

As it turned out, at the end of the harvest, I sold the farm produce, and paid them. I started out with no money but ended up richer.

SHORT POSITIONING
This is a trading strategy that seeks to capitalize on an anticipated decline in the price of a security or other financial instruments that are usually borrowed.  In the event of an interim price decline, the short seller profits, since the cost of (re)purchase is less than the proceeds received upon the initial (short) sale. In contrast to a traditional merchant who starts out to “buy low, sell high”, a short-seller starts out to “sell high, buy low”

HOW IT WORKS:
Short selling involves a four-step process.
1) Borrow: Borrow shares of the security, typically from a broker.
2) Exchange: Sell the shares immediately at the market price.
3) Exchange back: Repurchase the shares (hopefully at a lower price)
4) Return:  Return them to whomever you borrowed them from.

After all this, you will pocket the difference if the share price has fallen, but will have lost money if the price went up. Outside the stock market, this principle works just as fine.
We’ll illustrate the process with an example:

Some months back in Nigeria, a dollar was exchanged for over 500 naira. An event that many people made a great loss and some might have lost their business because they didn’t understand the concept of short positioning.

 A good lesson here is: When we anticipate the price of something would go up, we want to BUY it and own it to benefit from it when the value actually increases. But when we anticipate the price of something would go down, we DO NOT want to buy it. Instead, we want to BORROW it. That puts us in a position to profit when the price actually drops.

People with no money are usually forced to borrow anyway. Short positioning helps them do so wisely.

In the beginning of the recession in Nigeria, it made sense to purchase more dollar or other commodities like electronics with the hope of selling it at a higher price as the value for dollar went higher; Thereby making whooping profit. This is the common way of trading a.k.a. long positioning (or selling long).

But some months down the line, with some economic interventions, the price for dollar started to decline and was projected to keep going down. As earlier pointed out, when we expect the value to go down, we want to borrow. And so, if you borrowed $100 dollar, or goods worth that amount (at N 500 for each dollar) for your business enterprise to return six months later. By six months, the price for dollar had steeped down to about N 350. So while you have to return $100, in the naira equivalent you returned 35000 naira against 50000 you borrowed and in the process making a profit of 15,000 naira. You started having nothing but ended N 15,000 richer! Money from nothing!

This is what we did:
1) Borrowed $100 (N 50,000)
2) Exchanged for goods to be sold in Nigerian market for over N 50,000
3) Exchanged back to $100 (now N 35,000)
4) Returned $100 (now N 35,000)
Thus, besides your trading profit, you made an extra N15, 000…making money from no money!

From the above and previous posts we’ve clear explained why businesses run out of cash and what you can do about it. Use these tools and get that business up in shape. Let’s hear from you: drop your comment and or question in the comment section. To your business success, cheers!

Oluwaseun Hephzibah, Innovator @ Stackpreneur

I'm an entrepreneur, IT Consultant, guitarist, chess newbie, amateur writer and a Nigerian. I'm a great motivator and I can push you to achieve your dream. ------------------------------------------------------ email: babatundeseun2014[at]gmail.com

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