My first business was a spectacular flop.
I had the idea to produce an "audio magazine" for entrepreneurs, featuring interviews with successful business leaders. This was before the internet, so the distribution model was to mail audiotapes to our subscribers.
Dumb, right? The business failed for a lot of reasons, but the death knell was running out of cash. You've heard the expression that if your company were a human body, cash would be equivalent to oxygen--run out and no matter how healthy the rest of your body is you're dead.
To carry this analogy further, we were hypoxic within a few months of producing our first recording, but instead of grabbing for the oxygen tank, I was obsessing over the color of our logo. I spent hours with a designer fussing over how our brand would appear on the outside of the tapes. I wanted everyone to be impressed by our five-color design.
With the five-color logo, everything we printed cost more: business cards, shipping labels, branding stickers for the tapes, etc.
Choosing a five-color logo was just one of a litany of mistakes I made trying to create the perfect-looking business instead of focusing on accumulating and preserving cash.
I shut the business down after a year, with nothing to show for our work except a fancy label and some lessons learned about preserving cash. Here are my three top contenders:
1. Ignore Your Brand
If you look at some of the companies we know and love today, the first iteration of their brand would make you laugh.
Nike, for example, was called Blue Ribbon Sports. Eventually it rebranded as Nike, at which point Phil Knight coughed up $35 to a designer to create the Nike swoosh logo.
The original Starbucks logo was brown. The company switched to green in one of four versions of the logo used since the 1970s.
The original Red Bull came in a brown medicine bottle, which looked more like Buckley's Mixture than a supercharged energy drink.
The first Microsoft logo featured bulbous letters printed on two lines as in:
Gates was focused on making money, not art.
If your business is successful, there will be plenty of time to rebrand it, and you'll have the cash to hire a marketing company and make everything look sexy. But in the early days, worrying about your brand is akin to fixing a hemorrhoid on a stage-four cancer patient. You have other things to worry about. Sell stuff; accumulate cash. Once you have a successful business, then you can pour money into making your image fit your success.
2. Buy Used
In the restaurant business, there is an oft-repeated truism that it takes three bankruptcies at a single location before any restaurant can make money. The first owner of the restaurant walks in and--with all of the typical optimism of a new entrepreneur--pays cash for a brand-new commercial kitchen complete with fancy stove, commercial-grade walk-in coolers, etc., as well as all-new dishware, and pots and pans, thus depleting his cash reserves before opening night. Within a year, the restaurant owner runs out of cash and declares bankruptcy.
Then along comes a second entrepreneur who decides to set up her restaurant at the same location and buys all of the shiny new equipment from owner number one's creditors for 70 cents on the dollar, figuring she has made a wonderful deal. But the outlay of cash is still too great, and she too is out of business within a year.
It's not until the third owner comes along that the location actually survives. He saves his cash by buying all of the equipment off the second owner for 10 cents on the dollar.
Find a way to reduce the cash you spend on equipment, however you can. Can you buy used gear on sites like eBay? Can you share a very expensive piece of machinery with another, noncompetitive business? Can you rent instead of buying?
3. Pay Late, Collect Early
Another strategy for preserving cash is to pay as late as you can while doing what you can to get paid fast. Dell, for example, reengineered its cash-flow model to avoid growing itself bankrupt.
In the early days, Dell used to buy the parts for making a computer and put them on a shelf. The company would make a sale and then assemble the computer from the parts in stock. The faster Dell grew, the more parts it ordered to anticipate future demand. Pretty soon, the company was running out of cash.
Then Kevin Rollins reworked Dell's cash-flow cycle. I don't want to oversimplify a complex supply chain, but basically Dell now sells the computers and then orders the parts it needs to make them. The idea is to collect the customer's cash up front, as soon as the person decides to buy, while paying vendors as slowly as possible.
In the early days, focus on accumulating cash, because if you run out, nothing else matters.