When it launched in 2006, fashion brand Nasty Gal was the envy of startups everywhere. It quickly grew from an eBay store into a $100 million business, but the excitement was short-lived. Because the brand focused more on marketing and advertising than on addressing its business issues, cash flow suffered, profits dried up and the company fizzled out, filing for bankruptcy in late 2016.
Unfortunately, this story is all too common among startups. It's easy to get wrapped up in big ideas and forget about practical innovation -- constantly improving the components of your business to help you make money.
There are two components to practical innovation: coming up with the right ideas and turning them into profits. Both are challenging, but they're crucial to keeping your company alive, particularly through the early stages of growth.
Find your business's idea sweet spot.
The right idea is one that lives at the intersection of customer appeal, feasibility and profitability. Finding that sweet spot is easier said than done, however.
One way to jump-start idea generation among your team is to ask, "How might we . . . ?" That's different from starting a brainstorming session asking, "Can we . . . ?"
"Can we?" implies that the idea might not be possible. But by starting with "how," you're giving your team members the confidence that there is a solution out there -- they just have to find it.
Utilizing the Double Diamond approach (discover, define, develop and deliver), experimenting frequently and even joining a startup incubator to gain outside perspectives are great ways to try new things and hopefully find that next great idea. Then, once you have that idea, it's time to fund it.
Remember that cash is king (and queen).
According to a study by the Association of Chartered Certified Accountants, 82 percent of failed businesses attribute their demise to their lacking a clear understanding of cash flow.
Maintaining cash flow is one of the biggest challenges a startup will face. You must maintain a constant focus on timely billing, as well as accounts payable and receivables. This will keep you from becoming so caught up in your ideas that you forget to track the in/out of the company's cash.
If you're thinking that a loan will solve the problem, consider that getting one can be difficult, especially if your company has burned through cash in the past. In addition, according to Nav's Small Business American Dream Gap Report, 45 percent of small business owners don't even realize they have business credit scores (which strongly affect a company's ability to secure a loan).
You may choose to fund your company with your own cash, which was the case in the early days with the company I started, Mitchell Communications Group. But treat those funds as you would any loan that needs to be repaid on a regular schedule.
To ensure you're managing your company's cash flow in a way that encourages practical innovation, here are a few things to consider:
1. Bootstrap your way to the top.
Yes, you've heard the advice time and again that you need to be frugal and not blow through cash like there's no tomorrow. However, according to Fractl's research on startup failure, 40 percent of funded businesses still fail because they run out of money.
You can increase your chances of reaching and maintaining profitability faster by wisely managing your finances. Maintain a strong grip on both your fixed and variable costs, and save every extra dollar you can scrape together. Keep a rainy day fund or access to a line of credit that can tide the company over if cash flow slows. Continually look for ways to realize efficiency in your business. The first few years will be a challenge, but with hard work, a defined strategy and low expenses, you will get there.
For inspiration,look at marketing software company Hootsuite. The company set a goal to be cash-flow positive by the third quarter of 2016, and by utilizing smart spending habits and consistently landing larger clients, it was able to reach that goal a quarter early.
2. Resist the urge to splurge.
Basic financial principles also apply to businesses. Simplifying your expenses and living within your means are critical aspects if you want your company to succeed.
Consider Warren Buffett, for example. Although he's one of the richest people on the planet (worth more than $74 billion), he still lives in the modest Nebraska home he purchased in 1958.
Though not everyone takes Buffett's frugal lifestyle to heart, according to a new study by the FINRA Investor Education Foundation, only 40 percent of Americans spend less than they earn each month. When you create significant financial pressure for yourself personally, you're much more likely to pressure the business to try to close the gap for you. This is an unhealthy behavior that will not only hurt you in the long run but could bring down your company, too.
So, avoid becoming a statistic: Stick with your principles and wisely manage your personal expenses. Resist splurging on large expenses -- either personally or in the business itself -- when your company starts bringing in more cash. Use budgeting software to do the heavy financial lifting for you. And don't forget to think about long-term goals worth saving for.
3. Creatively encourage early payments.
While it's difficult enough to save money and spend your income wisely, you'll also face unexpected roadblocks along the way, such as clients and customers who are unwilling or unable to pay.
According to an Atradius Payment Practices Barometer survey, more than one-third of receivables for B2B companies aren't paid on time. And when those payments aren't made within 90 days, those companies lose nearly 52 percent of their value.
So, it's important to protect yourself by creating incentives for clients to pay early, as well as potential penalties when payments are consistently late. Discounts and reward programs are effective for reducing receivables, as is your provision of a method of electronic payment. By thinking strategically and realizing that these challenges will arise, you'll be able to prepare early and protect your cash flow.
Putting the "start" in "startup" is tough. But you don't need to come up with a billion-dollar idea to survive. By sticking to practical innovation and doing everything you can to make ends meet during those critical first few years, these strategies will make the long-term payoff well worth the effort.