Whether it’s due to a market downturn, a lack of foresight or even a global pandemic, running out of money often means shutting down for struggling businesses. According to a CBInsights report, 29% of startups failed in 2019 because they ran out of cash.
“Cash is like oxygen to a business,” says John Terry, adjunct professor of entrepreneurship at SMU Cox School of Business and founder of Dallas-based consulting firm ChurchillTerry. It can be the reason a business sails or flails. But running out of money doesn’t always equate to running out of options.
At Cox’s Caruth Institute for Entrepreneurship, Terry works with Simon Mak, Ph.D., professor of practice and the Institute’s executive director, to help leaders develop effective strategies for navigating every business owner’s worst nightmare. Here’s a walk through what these conversations look like.
Mak and Terry advise that forethought and preparation can help even struggling businesses stay in the black. Here’s how:
- Cash is king. Save it. Think about it as a rainy-day fund: Build, but don’t touch. According to a 2016 JPMorgan Chase & Co. report, the average small business is estimated to survive about 27 days if its inflows were to stop. Mak and Terry advise that companies save enough to cover between three and six months of all business-related expenses.
- Give yourself a safety net. “The worst time to look for money is when you need it,” Mak says. Establish relationships with investors and bankers you can trust. If you don’t, the stakes will be higher when seeking funds during a financial crisis. His advice? Open — and use — lines of credit.
- Notice warning signs. Mak says there are three telling signs your business could be headed toward financial trouble: You keep draining your monthly cash reserves; there’s a decline in repeat customers; or your prices keep declining in response to competition, which signals you may be entering a commodity phase of the market. Analyze your customer base to make sure it’s diversified. If you’re finding it increasingly difficult to differentiate your products or services from competitors, it might be time to innovate.
Don’t Just React — Innovate
Don’t give up if you’ve run out of money. There are measures you can take to save your business. Traditional methods of reducing costs — such as furloughing or laying off employees — can offer a quick fix, but now is the time to truly think like an entrepreneur.
- Find avenues for financial relief. Be creative and look for every opportunity to save. Maybe that means finding ways to encourage existing customers to pay you sooner. Maybe it’s something as simple as renegotiating your rent. Look to your supply chain for a payment extension or help with reducing your costs.
- Communicate extra with your vendors. Propose shifting your balance into a short-term loan, complete with interest. But don’t get hung up on the additional expense, Terry says. This conversion could be the difference between coming up with a large sum next week versus paying out a manageable sum over the next few months. This arrangement can build trust and repertoire with your vendors — and it’s better than offering them nothing.
- Explore e-commerce. Gradually, online sales will become the new normal. This is especially true in the wake of the COVID-19 pandemic, which has exposed businesses that aren’t online-savvy. But don’t rush onto this platform. “[Businesses] should dip their toes [into e-commerce],” Mak says. “[It] can open up new business models that you never even thought about because, suddenly, your whole customer base has expanded to the globe. It’s a whole other way of thinking about your business.”
- Grit your teeth — or let go. Nearly every entrepreneur has a story about how long they went without a paycheck, Mak says. It’s common for struggling business owners to draw from their personal savings to stay afloat. But stay prudent: If your business was already dying, it would be wise to save your personal funds and cut your losses.
Grasp Opportunities, Not Straws
Even when you’re running out of money, Terry urges business owners to maintain their integrity. “Speak truthfully to your vendors about payments,” he says, “make sure you can pay your employees and never, ever skip your payroll tax deposits.”
Mak encourages struggling business owners to consider the end of the road as the beginning of a new one. “You may find yourself asking, ‘Do I even want to be in this business?’” he says. Hard times are often the catalyst of this recognition, signaling that it might be time to cut your losses and start fresh somewhere new.
Finally, there’s real power in positive thinking and the caliber of company you keep. “Surround yourself with people who have grit and can move on,” Mak says. “That is the No. 1 [piece of] advice I can give, and it has nothing to do with finances.”
The Caruth Institute for Entrepreneurship within the SMU Cox School of Business can help emerging entrepreneurs find footing within their industry. See what the Caruth Institute for Entrepreneurship can do for you.