Managing Cash in the New Venture
There is an old banker’s rule of thumb according to which one assumes that bills will have to be paid sixty days earlier than expected and receivables will come in sixty days later.
Entrepreneurs starting new ventures are rarely unmindful of money; on the contrary, they tend to be greedy. They therefore focus on profits. But this is the wrong focus for a new venture, or rather, it comes last rather than first. Cash flow, capital, and controls come much earlier. Without them, the profit figures are fiction – good for twelve to eighteen months, perhaps, after which they evaporate. Growth has to be fed. In financial terms this means that growth in a new venture demands adding financial resources rather than taking them out. The healthier a new venture and the faster it grows, the more financial feeding it requires.
The new venture needs cash-flow analysis, cash-flow forecasts, and cash management. The fact that America’s new ventures of the last few years (with the significant exception of high-tech companies) have been doing so much better than new ventures used to do is largely because the new entrepreneurs in the United Stated have learned that entrepreneurship demands financial management. Cash management is fairly easy if there are reliable cash-flow forecasts, with “reliable” meaning “worst case” assumptions rather than hopes. If the forecast is overly conservative, the worst that can happen is a temporary cash surplus.
ACTION POINT: Develop “worst case” estimates of cash flow and cash forecasts for new ventures. Monitor receivables and inventory levels closely.
Management Team for the New Venture
Key activities are not to be in books. They emerge from analysis of the specific enterprise.
Whenever the objective economic indicators of a new venture indicate that the business may double within three or five years, then it is the duty of the founder or founders to build the management team the new venture will soon require. First of all the founders, together with other key people in the firm, will have to think through the key activities of their business. What are the specific areas upon which the survival and success of this particular business depend? Every activity that any member of the group thinks belongs there should go down on the list.
The next step is, then, for each member of the group, beginning with the founder, to ask: “What are the activities that I am doing well? And what are the activities that each of my key associates in this business is actually doing well? “Next one asks: “Which of the key activities should each of us, therefore, take on as his or her first and major responsibility because they fit the individual’s strengths? Which individual fits which key activity?” Then the work on building a team can begin. But all key activities need to be covered by someone who has proven ability in performance.
ACTION POINT: Examine a successful new venture either inside or outside of your enterprise. Was the innovator successful in defining key activities and assigning those to people of proven competence?
“It isn’t what you earn but how spend it that fixes your class.”
“Don’t tell me what you value, show me your budget, and I’ll tell you what you value.”
“We must consult our means rather than our wishes.”
“Economy is idealism in its most practical form.”
“A penny saved is worth two pennies earned . . . after taxes. ”
“Budgeting has only one rule: Do not go over budget.”
“A budget tells us what we can’t afford, but it doesn’t keep us from buying it.”
“If she’d kept up her AAA membership, she would have called them, but after the divorce, she’d had to cut some things out. Roadside assistance was one of them. Aargh.”
Melody Snow Monroe
“Now public business takes up so much of my time that I must get time a Sundays or a nights to look after my own matters.”
“You are no longer a boy, and one of the first duties which a man owes to his friends and to society is to live within his income.”
“When it comes to money and so many other things in life, understanding your weaknesses and strengths can help you with your future plans.”
“Budgets were originally designed as control mechanisms. As such they are traps …”
“Claiming “the budget can’t allow it” reminds me of when you walk into a restaurant at a civilized hour like ten o’clock and they say “the kitchen is closed.” For years I would hear this, and think, “damn, just a little too late, oh well, thank you, I guess it’s Denny’s again.”
And then one day it hit me: kitchens don’t close. Just as at home, at a certain point in the night, I stop using the kitchen–but at three in the morning, if I want to, I still have the ability to go downstairs and “re-open” the kitchen by turning on the stove and opening the refrigerator! Restaurants are not banks; at the stroke of ten an enormous airlock doesn’t seal off the kitchen and render the preparation of food an utter impossibility./ No, kitchens can open and budgets are what certain people say they are.”