Cash is King: I learned that the hard way
Published: March 26, 2010
Follow-up to my post last week on tips for entrepreneurs starting out… Many folks have asked me to talk about some failures I have had as an entrepreneur, so here goes.
Back in 1990, I started a small bagel and pizza place. It was my first and last retail start-up. I did the traditional business plan. I tried to think very hard about all the costs involved, I had spreadsheets and all kinds of formulas to calculate potential revenue. I had a few articles back then about lowering your estimates fairly dramatically in doing a retail business plan – the difficulty in trying gauge how many folks you could reach, how many would buy how much in your store, etc. By the end of the process, I felt like I had cut revenue expectations dramatically. So I launched in February 1990.
I was closed by year end and feeling pretty defeated. The biggest lesson I learned was that I didn’t have enough cash to fund the growth of the company. Sounds simple, but because my revenue assumptions were never close and my costs were very close, I ran out of cash before I could get past the Mendoza line. Oh I was making great progress, but I simply did not plan enough cash to adequately ramp the business.
I am asked to review business plans for future entrepreneurs all the time. They are almost always more optimistic on revenue and light on cash. As I mentioned last week:
Having a great idea for a new business isn’t enough. You need a well capitalized plan with plenty of cash. Take the time to think through the business model and what the costs truly are. Go into it with low expectations of revenue while you ramp up.