Cash is the main source of oxygen to your business, and I did learn this the hard way.
Story time:
I launched our first company in 2017. By year two everything was great after having a phenomenal first year. We were meeting all financial obligations AND had cash in the bank.
For me that meant we should scale and invest in growth as soon as possible. So, in 2018 we invested all money earnt in the first year with intent to set up a second business.
We secured another location over double the size of the first, hired a new team including our first executive, and purchased a brand-new fit out.
I thought at the time growing a business was stupid easy…
With only a few weeks out until grand opening, we received news we were not permitted to operate. Alright, we will dust ourselves off and simply move locations. Nope, you can’t do that as the lease does not have an exit clause in your favour.
Without boring you of the detail, there was no way of escaping our lease without finding someone to take on the 10-year term worth over $2mill.
We believed we had taken a diligent approach by engaging a lawyer, town planner, and agents to support the process. Disappointingly, there was a clear oversight, and we didn’t have time or cash to invest in pursuing any legal approach.
Our now CEO and I tried everything. It didn’t matter who we aligned with or obtained support; our efforts were unsuccessful. After exhausting all options, we became cowboy commercial property agents and obtained help from an experienced agent who was willing to hand over 100% commission.
We rented the space to a company at 50% rent for a few months which helped a little, but we couldn’t secure anyone long term.
Eventually, we found a company to handover the lease. But we had bled out completely in the process and didn’t have enough Free Cash Flow (FCF) from company one to sustain the loss of company two.
After a year of pain and uncertainty, we were finally celebrating with champagne around early 2020. Not because we had won, but because we had survived (only just).
Three months later the world shut down (COVID-19).
Shit.
Over 2019/2020 the company lost $560K. This might not be much money to some but for me only just starting out it was unfathomable.
It’s easy to be fooled by EBITDA or profit. Essentially this means nothing when an unexpected storm hits. EBITDA ignores and masks operating cash flow risks. No matter how impressive your EBITDA appears it’s a measure of a company’s ability to generate cash. Core profit doesn’t necessarily sort out the big bills, only cash does.
Essentially, I didn’t plan to ensure we had enough oxygen to survive the unexpected storm.
Here’s the thing; I was happy to operate on razor thin margins and go all in early. But I had no plan B for anything to go wrong and I certainly didn’t appreciate the power of cash flow at the time.
I discovered very quickly there is no one else responsible except you and no one is coming to save you.
Comments