Profitability is one of those spreadsheet things that we can sit down and calculate. The inputs are price and cost and we can play with the numbers until they look good enough for investors….
Of course it’s not that simple but cash flow kills the startup quicker than un-profitability. Cash flow adds the time dimension to the financials. Not all customers pay on time and some don’t pay at all. And yet, your suppliers expect you to pay them on time and your employes, for some reason, want a paycheck every two weeks or so and your significant other would like you to contribute to the rent. This is why Freemium business models can be risky. You get traction with endusers but you can’t control when they decide to pay you.
Maintaining cash-flow can be a significant challenge and one that most CEO’s are not prepared to deal with. It’s not fun to bug people about money. But you need a process to do so and that means you need to measure it… every day! Who is paying and who is not? Those that aren’t, how long have they been deadbeats?
Another important measure is how many days it takes to close a sale. A sales process gets more expensive the longer it takes for the customer to decide to buy. You need to keep an eye on this. Some sales channels close more effectively than others. Excuses don’t matter…only cash.
Sometimes you have to write letters and make phone calls. Here the thing: you’re managing your cash flow and all of the businesses in your value chain, including customers, are managing theirs as well. That means they are deciding who gets paid first and who get’s put off. It’s the law of the squeaky wheel.
If you are blest enough to receive venture capital, you can also run out of cash. Going back for more gets REALLY expensive.
Read Reality Check by Guy Kawasaki.
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