Simon’s Notes

What is the most important element, yet sometimes the most subtle, of any business? Two words, cash flow. When you first start a new business there are two very deadly traps that you can fall into, one of them is too little business and the other is too much business. Obviously, one of the traps might not make much sense… at first.

Too much business? How can too much business be a problem? Too much business can sometimes lead to a shortage of cash flow. What happens is that a lot of times new entrepreneurs get a little over eager especially when they see a lot of business. Here’s a scenario, you start a new business and your business takes off, you quickly run out of stock so you make another big order. Maybe you have a few clients that are ordering a lot of stuff from you, so you have to buy more. In your eagerness you don’t pay much attention to the payment plans that some of your prospects are offering (business is a cutthroat business), maybe you accept a few checks. The end of the month comes around and you find that you’ve sold a lot of stuff but you don’t actually have any money, the creditors won’t care, they want their money now, and you are screwed.

You might think that that scenario sounds a little silly, but it is a very common occurrence amongst startups. The way to avoid the pitfall of too much business is the same as everything else, plan your heart out. If you have a proper plan in place with regards to payments and orders, you can avoid these types of problems altogether.

A good idea would be to start small, make a commitment to not over commit yourself. If you’re starting a small business it might be a good idea to only accept cash, at least until you have a proper system in place. Don’t get tempted by the prospect of making thousands of dollars, it’s not worth the risk.

I can speak from personal experience, except that my experience went a little further. I started a computer business not too long ago. I was so excited by the first large order I received that I didn’t realize that the client had deposited a check into my account and not cash. I lost a lot of sleep over that check (I had already delivered the merchandise), and eventually I was slightly relieved when it was all over. That didn’t change the fact that the check was stolen and I had been scammed out of quite a bit of money.

All that to say, be very careful not to fall prey to too much business. Take a good hard look at every large order that comes your way, and don’t feel pressured into committing before you have analyzed it from every angle. Be wary of the guy that says he wants his stock right away, but is not willing to pay right away. Remember, if it’s too good to be true, it probably is a lie.

Simon

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Filed under: Money and Finances by Simon Rodrigues