The more you can squeeze out of your cash, the better off you are. That is true, but only to a point. Your efforts to get more out of your cash must be balanced against the need of the business to produce a quality product or provide a quality service. For instance, you may conclude that by cutting your employees' pay, you can stretch your cash an extra few months. But cutting their pay may make them resentful and less productive, resulting in product defects or inferior service to customers.
Here are some suggestions offered by the entrepreneurs we interviewed about effective ways to stretch your cash in the start-up days:
Watch your overhead. Some entrepreneurs, feeling flush because of the savings, investment, or other start-up funds they have in hand, decide that their business has to "go first class" to present an appearance of success to outsiders. So they go overboard in acquiring store or office space or buying furniture and equipment. Yet it may be possible to achieve the same results at lower cost, as George Kachajian, founder of Silicon Technology Corp. in Oakland, N.J., did in his start-up days. "In the beginning, I would look in the papers for auctions on other businesses that went under. I believe the table we are sitting at here was purchased at an auction of a company that opened world headquarters in November of a given year and went bankrupt in February. Apparently, they didn't have a cash-flow projection."
It's also easy for new companies to be deluded by early initial success and become inattentive to their expenses, says Crate & Barrel's founder Gordon Segal. "You have to be very cost conscious in what you do, even when you start getting initially successful. The expenses start running away with themselves, and soon entrepreneurs discover that their expenses exceed their incomes and suddenly they are in financial difficulty. They just don't control the business. No matter how much initial capital you have, you need to be very careful about how it is spent. You cannot let your expenses exceed your income. You have to create a sense with your vendors and your associates who work with you that this has to be."
Negotiate on price.Most of the successful entrepreneurs we interviewed point out that they had little reluctance to take every opportunity to try to negotiate lower prices. Confides Mo Siegel, founder of Celestial Seasonings: "My biggest secret was always being a good buyer. I am a tough buyer and I am a tough negotiator. If they tell me it cost $3, I don't mind telling a store I only have $2, I am sorry. I don't mind bartering. I don't mind bartering on fixed prices if I am really against the wall. No problem."
Frank Carney, Pizza Hut founder, seconds that approach: "It never hurts to use, 'Boy, I am just starting out. I don't have a lot of money and I can't afford this, but I sure like this.' It is the old negotiating game."
Maintain good relations with your vendors. Vendors from whom you obtain regularly required supplies and services can also be helpful in improving your cash flow. One vendor who will sell to you on 30 days' credit may be more valuable than a competitor who offers lower prices but requires payment on delivery. Similarly, a vendor who will reliably deliver goods on a timely basis can help save your business cash by reducing the amount of inventory you need to maintain on hand.
Here is how Carney explains the dilemma: "You want a certain quality and you want the most competitive price, and you want to be sure you get the service that matches what service you are promising to your customers. It doesn't matter at all if you get a great price and then get service and delivery terms that you cannot deal with. You have to get it to match what your space is for storage, what your capability is financially. It is best to get delivery just in time for production so that you minimize the inventory that you have in your store. It doesn't matter what kind of store it is. In order to do that, you have to have a good relationship with that supplier and you have to pick your suppliers based on what kind of service they can give. You have to study all those factors in order to make the determination."
Be careful about extending credit. Start-up entrepreneurs are particularly vulnerable to unforeseen cash problems stemming from bad credit. Because start-up entrepreneurs are so eager to make those initial sales, little attention is typically given to checking the credit history or capacity of potential customers. Christine Martindale of Esprit Miami stumbled in this area during her first year in business: "I was honest and I expected that customers would pay me. I had a lot of people who didn't pay me the first year. In that year I lost four times my entire investment." In retrospect, she says she would have hired or used the services of a bookkeeper who could have asked potential customers for credit references and/or used the services of a credit agency that keeps tabs on companies' credit histories. Paying such agencies is usually money well spent.
Seek up-front payments. One good way to test out the likelihood of collecting from a customer seeking credit is to ask for an up-front payment equal to one-fourth, one-third, or one-half of the amount of the sale. You might also seek to schedule the balance due to be paid in regular installments on certain agreed-on dates. A poor credit risk will probably refuse both options. Once customers establish a track record of paying on schedule, you can choose to forgo the up-front payments.
Aggressively collect receivables. Even customers who can pay will often try to take as much time as possible to come up with the cash. If they can use your credit, it will be cheaper than what a bank would charge. Your challenge is to avoid serving as banker to your customers. There are a number of approaches to speed collection of receivables. One is simply to get on the telephone the day after your bill comes due; if you allow 30 days for payment, you should be on the phone to the customer on day 31. Another technique is to provide a discount of some kind -- typically 1% to 3% -- to those customers who pay within some specified time, say 10 or 15 days. The main drawback to this approach is that some customers who pay after the specified time will take the discount anyway, so you may have to experiment to determine if it works for you. Alternately, you can charge interest of 1% to 2% monthly to customers who are late payers. Usually the best approach is to regularly contact late payers by phone; if they make a habit of delaying, then you may have to decide if the customer is valuable enough to justify the late payment or if you should refuse to sell to that customer.
Exercise care in your pricing. Along with being too easy on extending credit, start-up entrepreneurs are often unrealistic about the prices they charge -- erring on the side of charging too little. In the service area, this is an especially common trap, as James Lowry, founder of James A. Lowry Associates, a Chicago-based consulting firm, can tell you: "We made some mistakes early on that could have cost us dearly. We overpromised in terms of what we would give a client in the length of the analysis, the number of hours invested on site, the quality of the report, the number of pages. We were kind of naive in terms of how many hours that would take of my time and staff time to produce that. We looked up at the end of one project and the client was just ecstatic over our work, and the accountant looked at how much we charged and said we lost money on the deal. It was trial and error. It didn't cost us so dearly that we bellied up, but it cost us in terms of profitability. Now I think we are pretty secure in how we scope out projects." His point, though, is that a company that underprices itself can seem to be doing great because it is very busy and then suddenly find itself running short of cash. Conducting cash-flow analyses can help you anticipate such a problem before it catches the business by surprise.
Don't compromise your company's image. In their zeal to trim costs, some entrepreneurs inadvertently cut into items essential to creating the intangible attraction that is the heart of a company's appeal to customers. Gordon Segal explains the notion well, after pointing out how hardheaded he has always been in watching pennies. "We never accepted a first price on something. We always said, 'There is another price. Now, what is it?' It is very important to be cost conscious of everything and not let the artistic part of us overwhelm the business part. Yet we often say in our business that it is a mix between an arts one and a business one. It is a very narrow line. If we are too artistic and don't watch the costs of running the business efficiently, we won't be in business. On the other hand, if we are too much of a business, we won't have a unique enough or colorful enough presentation or group of people who are good enough to run the beautiful store. So it is that very fine line that you have to maintain."
Frank Carney makes this observation: "Saving money in the beginning of a business by buying as cheaply as you can is good for everybody, but you have got to remember that some businesses are really geared to a certain style of consumer and a certain flair, and you have to make investments to get that flair. If you have a barber/beauty shop in a mall shopping center and it is supposed to look different than the normal barber/beauty shop, and if you save by buying used equipment and put cheap carpeting in and cheap this and cheap that, you might save a lot of money, but you wouldn't have the pizzazz of that business."
This material was excerpted from Chapter 7 of How to Really Start Your Own Business, by David E. Gumpert.
Copyright 1996 Goldhirsh Group Inc.