It’s no secret that most startups are undercapitalized. They need every penny just to stay in business long enough to produce a positive cash flow. Even those that have achieved seed financing usually find out in short order that they need a much longer runway to give sales a chance to take off.
Most investors want to see some revenue before they will take a risk on you. So it’s critical, especially in the pre-rev startup phase, to strip your company down to its bare essentials, be resourceful, and discover and use your hidden assets. If you can’t lengthen the runway, you can at least lighten the plane!
As professional speakers in the world of entrepreneurship, we hear hundreds of business ideas every year. The proponents are passionate and convinced that they have a marketable solution. This may be true, but the market usually requires more time than they have planned to accept their solution.
Most of these wantrepreneurs begin by describing the assets they need to buy and the positions they need to fill before they make the first sale. We cringe. Nothing is harder to get off the ground than an overloaded airplane. They can use up the whole runway and still not take off. It doesn’t mean that they may have never taken off, it just means they didn’t take off with the runway provided.
Aside from using trades, strategic alliances, and a repurposed laundry room, aside from keeping our staff down to two unpaid owners and one underpaid manager, and aside from outsourcing our production and services on an as-needed basis, we found many ways to lighten our load to get us off the ground in time. But long after we were airborne, we continued to outsource everything but accounting, quality control, and sales. Here’s why:
Things are happening much too fast to be dependent on reports that are a month, or even two weeks old. You need to know what’s happening daily. Our most important indicator of business health in our critical startup days was what we called the “Cliff Report.” Basically it was our cash flow projection that told us how far we were from that financial cliff that represented bankruptcy.
Understanding your true cost of sales is critical and requires a savvy in-house cost accountant. Most businesses fail in the expansion or buildout phase because they neglected to appreciate how much it would cost them in time, money, and personnel to manage their increasing sales and provide the customer service necessary to protect their reputation and ensure their future reorders.
Pay-for-performance is at the heart of every successful enterprise. Chose incentives that are based on sales, growth, and profitability. In order to stay relevant, these bonus programs must be paid in the shortest period of time following the close of the previous month. It’s hard enough to get your in-house accountant to crunch these numbers before the 10th day of the new month. It’s almost impossible to get these critical numbers in a timely manner from an outsourced accountant.
Investing in in-house production is probably the greatest financial drag on a startup. It assumes that the company will be able to achieve sufficient sales to justify the investment in production facilities. But for most startups, the initial monthly payments are made out of the proceeds from loans or stock sales. But these payments are due regardless of sales.
This dilemma forces many startups to outsource production, as it did for us. But by keeping quality control in-house, we were able to deliver a high quality, consistent, and on time products without the financial burden of in-house production facilities.
We also discovered another advantage. When production is in-house, there’s tremendous financial pressure to put products on the market that might not live up to your quality standards because you have so much invested in them. But with proper outsourcing, oversight, and performance contracts you can refuse payment for lots that don’t meet your standards.
The hardest lesson we learned in business is that no one is going to make sales happen but you! Not only does the buyer want to see the person responsible, but the middlemen you hire are simply not going to do the job! At least not unless you provide them with representation on your payroll.
You have too many competitors with their own people making the sales. They are focused on their products only. Because brokers, distributors, and retailers carry many more products than yours, they tend to make whatever sales are the easiest. Especially as a startup, with unproven products, you need your own salespeople to give your products the personalized attention they deserve.
We always viewed customer service as part of sales. That too should be kept in-house since your product’s reputation and future sales are on the line. You need a direct customer feedback loop to keep your products competitive, relevant, and priced right. Your sales team can give you that.
To survive the startup process, you must give your sales the time they need to take off. Outsourcing as much as possible is a good strategy to lighten the weight so you can meet that challenge in the runway provided. But don’t outsource the three key functions that keep you in the pilot seat and keep your plane under control!