What To Do When Your Business Is Running Out of Money

A great deal of startup and entrepreneurial content (including my own) is focused on how to start and grow companies, as well as strategies for achieving persona; success. However, there is a dark underbelly to growing a company, however. The life of an entrepreneur is not always one of joy and unbounded enthusiasm. Today I’d like to explore what to do about one of the most dreadful entrepreneurial situations — burning through cash reserves.

One of the most stressful times in the life of an entrepreneur is when your company begins to run out of funds. Perhaps you overestimated how quickly your product would come to market? Or maybe a key supplier/manufacturer overpromised on delivery times? Perhaps the general economic malaise played havoc with your plans? Whatever the reason, many of us have been in the circumstances where our business was threatened due to the steady drain of capital.

There’s no magic bullet for this situation, and I’m not going to pretend that two thousand words can possibly solve your particular circumstances. Instead, I want to focus on strategies that you can employ that can keep your emotional state healthy and may also keep your business afloat. If stress becomes overwhelming, you won’t be in any shape to search for solutions. Thus, you can use some or all of the following tips to keep yourself on an even keel, allowing you to continue the battle for business survival and success.

Don’t Lose Track of Success

Just because your business has run into difficulties doesn’t mean it’s a failure. Take some time and review all the successes that you and the company have achieved since startup. Actually sit down and make a list of these accomplishments. Have you launched a product? Garnered any awards? Raised initial angel or VC funds? The list of milestones could be much larger than you think.

About fifteen years ago, a company I co-founded ran into some financing difficulties. I sat down and made a list of milestones that had been achieved — securing the Vice Chairman of the North Face for our Board of Directors, hiring the former Chief Merchandising Officer of the Sports Authority as President of the company, raising several million dollars of initial funding and launching a super designed and functional website were on that list. As I reviewed these, I realized how much the company had already accomplished. Lack of financing was just another obstacle — and we’d already overcome a number of obstacles to get to where we were.

By the way, this list can prove to be an effective tool beyond your own state of mind. Share this with employees, vendors or suppliers that express concern about your circumstances (see below). You may find that it gives them comfort. Additionally, you should be using this as a traction tool in any attempt to raise additional capital.

Control what you can.

In any business or personal circumstance, there are elements that remain under your control. Identify what these are. Once you have a list of items that you can control, spend some time focusing on these. Often, these will be small and mundane in nature: aggressively collecting receivables, managing communication with your direct reports, deciding to eat more healthy lunches (seriously!), etc.

It may seem trite or even nonsensical, but this strategy can ease your burden. Right now, a large component of your stress is related to your inability to control the situation. By focusing on elements that you can control, you bring a measure of comfort and self-reliance back into your life. Believe me, your psyche will benefit.

Cut 25% of your costs.

When you first realize that you are in trouble, it’s time to do some analysis. To begin with, you’ve got to honestly figure out how much time you have left if conditions don’t improve (typically called your ‘runway’). If somehow things have crept up on you and the amount of operating time you have left is less than 3 months, then I’d say you can ignore cutting costs and focus on the other strategies. Otherwise, if you can lop off 25% (or stretch to 33%) of your expense load, you will absolutely extend the life of your company — and that time might prove the difference between success and failure.

This is not the place for a comprehensive primer on expense management, but consider the following tips:

Review. Immediately perform a top down P&L review with your key managers, month by month for the past 6 months to a year. In addition to giving you a snapshot of your business, this will allow you to identify every single recurring cost that you incur. Go through each of those recurring expenses with the proverbial fine-toothed comb. You need to identify ways to cut or eliminate as many of those recurring costs as possible. It’s likely that the two largest expenses will be staff and rent, which we’ll address in a moment.

Repeat. Don’t make this review a one-time event. Examine how well you’ve done at reducing or eliminating your recurring costs. Each month, perform the same review and see if you can discover new ways to reduce your cost structure.

I Can’t Pay The Rent. Negotiate with your landlord. It’s never comfortable to tell someone that you may not be able to pay them. However, if you address the situation proactively, often you will achieve positive results. Meet with your landlord in person to discuss your situation. Explain the temporary financing situation and then set forth all the accomplishments from your list and prospects for success. Close by stating you think there is a 50% chance that you will go out of business. At that point, ask them for assistance and suggest that you are looking for 4 months of free rent. Note that you feel horrible, but that you didn’t want to be coming to them in a few short months to tell them you were closing down. The worst-case scenario here is that your landlord says no. Many times you’ll find a sympathetic ear — finding a new tenant can be time consuming and expensive. Even if a landlord doesn’t agree to your request of 4 months free rent, she may be willing to explore creative ways to temporarily reduce your cost structure.

Cut Me A Break. You can have similar discussions with your key vendors. Call each major vendor and give them the same speech you gave your landlord. At the end, ask for 4 months of free supply/service. Vendors often have less flexibility than landlords, but you may be surprised at how many will accede to your request or come up with another solution. If they say no, ask them for additional suggestions.

Shop Around. Call up every major competitor to your vendors and say you are considering switching providers. Tell them that if they were to offer six months of free service, you’d be willing to switch. Then be prepared for negotiation and see where that takes you.

Cut Staff. Unfortunately, there’s no way around this. If you run a company with employees, you’re going to have to let some people go. If your business is down to ½ year — 1 year of life, you probably need to cut 33% — 50% of your salary load. Laying people off is a terrible experience. There’s no way to sugarcoat the fact that you will feel terrible. The only consolation I can offer is that the lowest performing / value staff members must be let go in order for the organization to survive — and the organization’s survival provides a foundation for the remaining staff members continue to have a job.

Here is a quick (admittedly emotionless sounding) 3-step process for cutting your staffing costs:

Cut non-core staff first. Examine your PR, non-direct marketing (NOT sales) and administrative positions and see if you can consolidate or eliminate. See if some of these folks can work for you on a part-time basis.

Examine high priced salaries. If you’ve been around for awhile, it’s likely that you hired senior staff members when the economy was in better shape. Research the current labor market and determine if you could hire a qualified individual for the job position at a lower salary cost.

Offer or Eliminate. Take the results of your research to each of your senior staff members and explain the situation. Ask them if they would be willing to take a reduction in their salaries — perhaps for a specific period of time. If they demur, you will need to be prepared to immediately initiate the process of replacing them, in order to achieve the cost reduction. By the way, some entrepreneurs are unwilling to do this. They feel that even when employees voluntarily reduce salary, they are left with unhappy staff. It’s your call as to how best to manage the combined problem of morale and rapidly draining cash flow.

Cost cutting is a nasty process. When negotiating with landlords or vendors or laying off employees, you’re going to feel bad. However, you’ll likely discover that the end result (regardless of the specific financial effect) is to dramatically lighten your stress load. Once again, you’ve taken action and asserted control in a situation that makes you feel helpless. These cost cutting strategies have a double effect — good for the business and good for your (eventual) emotional health.

Generate Revenues.

The heart of any successful business is sales. Although it’s difficult, lack of capital can be solved by growth. In most capital constraint situations, a 30% increase in sales is all that stands between you and ultimate success. And a hard-core press for revenues can lead to dramatic improvements in morale — for both you and your staff. Break this down into two components:

Sell Anything. OK — I don’t really mean sell anything. I’m not suggesting you start selling bubble gum, for example (unless, of course, that relates to your business model). However, the mantra “Sell Anything,” is a useful meme. In order to bring dollars in the door, you need paying customers/clients. If there is something else you can sell related to your current offering, start now! If you offer a service, can you create a packaged software product offering instead (conversely, if you sell a software solution, can you package up a service offering alternative)? Are there opportunities to resell complementary products to your customer base and prospects? Every dollar of revenue you generate staves off the day of reckoning. Generate enough sales and that day of reckoning never comes.

Measure Everything. Once you focus your team with the Sell Anything mantra, start measuring every relevant metric (if you’re not already doing this). Prospect generation. Cold calls. Sales calls. Sales meetings. RFP’s. Contracts. Sales closed. If it fits in the sales cycle, measure it. Keep running aggregate and weekly totals of these statistics, and focus your team on improving each and every metric. Celebrate successes — not just sales closing but improvements in any of the measurements. This helps by (a) creating focus on improvements in an area that could literally save your business, (b) providing much needed encouragement by celebrating small victories as well as large ones and (c) reducing stress (particularly yours) because, once again, you are taking action and asserting control.

These tips barely scratch the surface of coping with the situation. I hope that you’ll find them useful if you are in, or ever find yourself in, these circumstances. If you’ve been here before, I know the community would love to hear your war stories and other tips for dealing with this scenario.

One final thought for you…Remember that even if you actually have to shutter your business, you’ve still achieved a great deal. You’ve taken a shot at starting and building a business and learned (hopefully) some valuable lessons along the way. An ‘open secret’ is that many financing sources prefer to work with an entrepreneur that’s failed vs. a completely new entrant. Your history in starting and running your own venture, even though it didn’t work out, is a valuable currency. When you’re ready, pick yourself up and get back into the game.


Originally published at pegasusny.com on April 19, 2016.