The following is the second of 3 posts from our guest blogger Paul Schoening, President of Plan C.  He is bringing a unique perspective on what it takes for a small business to survive.  In his first post (here) he talked about the difficulty of starting a business based on passion and how that passion is both good and bad.  He discussed how entrepreneurs need to look at building a sustainability plan and not a business plan.  In this blog are his next two tips.  Over the next few weeks, the final post will outline the final two survival tips.  Enjoy!

2.  Show me the money:  When starting a new business, oftentimes entrepreneurs focus on sales revenue or profit figures to assess how they are doing.  I know I did.  In fact, we had record sales in our final quarter as a business and yet we couldn’t make it last. 

While it is good to be profitable and increase sales – it is absolutely critical to have a positive cash flow!  You need to have enough cash flow to give yourself time to get off the ground and pay your ongoing bills. Fast growth and increased sales are great, but this can create a sense of overconfidence that can skew your decision-making especially with early business success. Conversely, when times are challenging and a business owner is under pressure we can easily make rash decisions fueled by emotion, not logic (i.e., “how the hell am I going to pay for this?”).

One example of cash flow issues was custom cabinet seller M&J Kitchens – who had survived the Great Recession even when its revenue from homeowners and builders dropped by more than half in 2009.  They weathered the storm.  Then, late in 2011, with sales almost 42 percent higher than the prior year, they were unable to pay their bills and owner Drew Davies was forced to shut the  26-year-old company down. What happened?  M&J highlights how important cash flow is.  The issue was a “cash-flow crisis precipitated by his bank and trading partners, who Davies says, abandoned payment agreements that had been in place for decades.”  M&J’s cash inflows were coming in slower and it’s payments still needed to be made. In this instance “M&J had to float their customers—builders, architects, and home remodelers—who had slowed their payments, typically from 30 days to 60 or 90. At the same time, his own suppliers changed agreements that had been in place for decades by cutting credit lines or requiring deposits, which Davies says could tie up between $60,000 and $120,000 per month.”  After more than 25 years of business, the company was forced out of business, not because sales were down, but because it couldn’t cover its cash flow.

Source: Businessweek.com February, 2011

What happened to M&J is not atypical.  It can happen to all of us.  Which is why we need to have cash flow plan.  One way of looking at this to think about how much cash is required to make payroll, pay suppliers, and cover other expenses each month – then figure how many months of cash reserve you will need to have if things don’t go smoothly.  In my case with the bike business, I usually looked out 3 to 4 months.  I should have been looking out 6 to 9 months.  Each business is different – so think hard about what a downturn or change in situation would mean to you.  How fast do your customers pay?  How long can you push out your own payments.

One way to avoid these mistakes is by finding a great accountant or financial consultant and using them to map out a plan for this.  Look at ways you can collect money faster by offering discounts for payments early or requiring a deposit.  See how you can restructure payments on goods and services that you use.  Look at payroll differently – offset high bi-weekly pay by using quarterly or annual bonuses that provide flexibility for you and rewards your employees for great work.  If  you can’t afford to hire an accountant full-time, there are many firms that you can outsource part of the accounting of the business to or hire in for consulting.  The voice of reality (a shrewd accountant) will keep you in check.

3.  Double the time you think it will take:  Time is a resource that is often underestimated when starting a new adventure.  In the passion of developing out this great new idea, we forget about how long things can take.  Particularly the little things.   You can celebrate that you are the President or CEO of your business and be very happy to have the title. But you are also the janitor, the sales person, marketer and customer service rep. You need time to handle all of these responsibilities, take time to do research and to ensure that you are continuing your education and staying on top of the latest trends and facets of the marketplace.

Here are a few examples of some rough time estimates that an entrepreneurial friend put together for me for some of the things that he does that are not part of his core business.

• Accounts payable: 2 hours per week
• Accounts receivable: 1 hour per week
• Payroll: 1 hour per week
• Social Media Outreach: 3 hours per week
• Developing marketing campaign: 2 hours per week (varies, but this is an average)
• HR: 1 hour a week (up to 8 hours a week when issues arise with employees or when hiring)
• Scheduling: 1 hour per week
• Responding to sales requests: 1 hour per week
• Networking: 2-4 hours per week
• Miscellaneous (IT trouble shooting, equipment purchase/repair, responding to solicitations, etc..): 2 hours per week

This totals up to over a day and a half out of the week for work doesn’t even include business development, sales, or anything that has to do with the work that drives value for his customers (granted, he could probably reduce his Social Media Outreach – I mean really, 3 hours on Twitter, Linked-In and Facebook?).

One way to overcome this time crunch is to look at outsourcing some of the functions of your business so you can focus on the areas of which you have immediate control and greatest value-add. This might require you to increase your outflow of cash (which can be troublesome – see #2) but if it can allow you the time to focus on the important things for success, then it is worth it.  Another option is to think outside of the “box” and look at creating partnerships and alliance where you can trade services or leverage each others core competencies.