This is part of a 7-part series on reasons why businesses fail.
Time and money — two things we always seem to find ourselves short of. In the competitive arena of business, a company can be made or broken by how effectively it uses its resources. Or, they will be running out of money. Too many startups have run out of cash and been forced to close up shop. Having a poor cash flow can signal the impending death of a company, and not preparing how to deal with it means certain failure.
Every company needs money to operate and survive. For most startups this is a problem since they are less likely to be profitable in the early stages, spending more than they make. A company with funding has an advantage of being able to operate at a loss for some time, but even that will provide a limited runway. It’s imperative that a company continually works towards becomes self-sustaining.
How To Survive When You’re Burning Cash
Until your company is self-sustaining, you must watch your cash burn. The limited resources need to keep the company afloat until the next round of funding or until positive cash flow is reached. A prudent entrepreneur will only spend on the essentials and save wherever she or he can. But for many entrepreneurs, emotions get in the way. In a desperate attempt to spawn growth, they end up throwing money in every direction — sometimes it pays off, many times it doesn’t.
Some might argue that running out of money is normal for a startup. The argument says that by playing it too safe, you run the bigger risk of missing out on opportunities that could potentially launch your business. Still, a failed pivot is highly likely to be the last song a startup sings. The best way to spend your valuable resources wisely is to have a well-formulated plan, like a development roadmap, which can help you and your team focus on your goals and avoid wasting money.
Every business decision needs to be made while taking certain factors into account. Your company’s ability to take on risk can determine whether or not a cost-intensive pivot is the right thing to do. So what should it be? Go for the risky opportunity and hope it pays off or keeping grinding the same ax, hoping you reach profitability?
Case Study: To Pivot Or Not To Pivot?
Women’s clothing store Vanity closed shop last year after being in business for over fifty years. The South Dakota based business declared bankruptcy and closed all of its stores. Why? They couldn’t keep up with the changing business environment. Low sales and diminishing revenue forced them to call it quits. Many stores at the time were losing the fight against online retailers and more niche brands.
It wasn’t just Vanity that was struggling to make enough sales. Many other clothing stores were dealing with similar issues. Even Target, the department store giant which was once known for quality apparel was now in a tight spot. Realizing the doomed path is was on, Target decided to pivot. It invested huge sums of money into rebranding and marketing to modernize its image. It paid off. Sales increased, share price increased, and most importantly, Target was back on the map.
Case Study: The First Electric Car Company To Not Fail?
Yep, we’re talking about Tesla. The founder, Elon Musk made his fortune by starting an online bank which later merged with PayPal. Musk invested $90 million into SpaceX and Tesla, yet stated in an interview that he expected Tesla to fail. When the 2008 financial crisis struck in 2008. companies like Chrysler and General Motors received billions of dollars in government bailout money. Tesla got only a fraction of the help and was still in need of a miracle. When all hope seemed lost, German automaker Daimler invested $50 million into Tesla. Even then, up until 2013, Tesla was operating with one to two weeks of the runway.
Even though the financial situation you’re in likely differs from that of Elon’s, there’s a lesson to be learned. Despite enormous obstacles, include severe financial hurdles, Elon kept up hope. Many entrepreneurs give up when their company is strapped for cash and the end feels near. In truth, for a startup to succeed, the team must remain focused on their mission. Only through the commitment to provide real value to the world can a team survive the storm and find profitability. Lose sight of the mission, and all hope will be lost.