Any successful entrepreneurial venture involves investment– an investment of time, an investment of labor, an investment of passion and, most of all, an investment of money. In times of recession, managing a venture’s finances are more critical than ever. It is all too easy to fall into the trap of reckless spending without any cash flow.
The Three Phases of Entrepreneurial Finance
Typical successful ventures, particularly under the guidance of inexperienced entrepreneurs, will generally go through three distinct phases of financial management:
- Inadequate Spending. Too often first-time entrepreneurs are afraid to put adequate skin in the game, not only in terms of money but also in time and passion. They will start their ventures without proper marketing, without the proper tools and unprepared to pull the trigger on critical investments to take that next step. Many ventures wither and die at this phase as a direct result, or at the very least will never see any growth.
- Reckless Spending. If a venture escapes phase 1 alive and kicking, the tendency is for an entrepreneur to get a little too comfortable with the idea of business expenses, write-offs and luxuries. The problem is especially prevalent during times of prosperity and growth as reckless spending is hidden behind profit. The same risk-taking spirit that drives the entrepreneur can drive a young venture into debt, particularly if there is a sudden drop in sales revenue. It happened at the end of the dot-com bubble. It happened at the end of 2008. Many promising and fast-growing ventures end up vanishing after a string of credit line defaults and maxed out plastic.
- Justified Spending. To survive the long haul, entrepreneurs and their ventures must adopt a policy of justified spending. Carefully gauge growth and opportunities and weigh risk appropriately. Make capital investments in assets with direct returns rather than new couches and desks for the office. Don’t be afraid to pull the trigger on the tools you need to take you to the next level but don’t automatically upgrade all your workstation displays to 24″ flat panels. Resist the temptation to loosen your spending habits when there are surpluses.
Change your Habits
While entrepreneurial ventures are especially susceptible to poor financial management, they have one key strength: nimbleness. Established corporations may be able to ride out smaller financial recessions or bad decisions relatively unscathed, but they have a lot of trouble adapting to longer-term changes in the environment. If you notice that your venture has bad spending habits (on the low or the high side), don’t be afraid to do something about it. It’s your skin in the game, after all.
- Focus your Investment. Rather than dumping cash, time and resources into secondary revenue streams, focus on what turns a profit. If you’re offering your clients the world on a silver platter and only one or two services or products result in take-home profit, consider consolidating or shifting your offerings. Likewise, your cash cow a year ago might not be as profitable as it once was; perhaps there’s more competition or your clients’ spending habits have changed.
- Project a ROI for All Spending. The concept of justified spending becomes much more tangible when you start projecting a return-on-investment for all spending decisions. It is healthy to occasionally splurge when times are good, but you better be able to realize a return on the other 90% of your spending. Unless image is particularly critical for your industry, you can get away with used furniture and you probably don’t need that cappuccino machine.
- Control Growth. Growth is a wonderful thing as long as it is measured and controlled. Uncontrolled expansion can bury a venture just as easily as reckless spending. Just because sales are way up this quarter doesn’t mean the trend will continue next quarter. It is a lot harder to shrink back down gracefully than it is to control growth in the first place.
Make the Tough Choices
Sometimes entrepreneurs can find themselves in a bad position no matter how diligent they have been about their spending or how well they have managed growth. Competitors can spring up without warning. Clients can change their spending habits. Lenders can tighten credit line terms. Any of these events can put a real dent in your revenue and profits and endanger the venture. Can you afford to wait out the bad times? Will revenue ever come back to prior levels? Unfortunately times like these usually call for unpleasant actions.
- Reduce Monthly Overhead. Are you subscribed to premium-tier internet service? Do you have monthly or quarterly membership dues in trade associations or chambers of commerce that add little to your bottom line? Are you subsidizing any non-standard employee expenses? Reducing or eliminating unnecessary monthly expenses is the first and least painful step in helping your venture stay afloat during tough times.
- Consolidate Space. Do you lease your office space? Talk to your landlord about scaling back to a smaller unit or subletting portions of your space to a third party. Chances are they would rather move you into a less costly unit versus losing you as a tenant entirely if you close your doors.
- Liquidate Non-essential Assets. Take stock of your venture’s assets. Are there underutilized pieces of equipment (particularly ones that are financed or leased) that could be sold or transferred without severely impacting company operations? You will probably take a net loss but this may outweigh on-going operating costs and loan or lease payments.
- Renegotiate Salaries or Reduce Staff. Sometimes you have no choice but to reduce payroll. If the alternative is possible unemployment, you may have luck renegotiating employee salaries as a team. This tends to work better in smaller, newer ventures versus established companies. If that proves unsuccessful, you may be faced with layoffs. This is still better than everyone, including you, being out of a job.
Prosper
With all of these tips in mind, don’t forget to enjoy the good times. You didn’t choose the most risky and stressful possible career path without expecting some kind of reward. Just remember to enjoy those rewards in moderation.
