Jun 20, 2017 Mina Fung
Your startup is growing fast. You want to ride on the momentum and opportunities. You want to build a team, stock up, and perhaps explore other markets. That’s a normal reaction for most startups. But what’s normal could be cash flow mistakes that set you back long before you realize there’s a problem. Avoiding these mistakes can help you make the best of your resources and funding while scaling your business for growth.
I enjoy helping founders and entrepreneurs discover growth opportunities and scale for profitability. Avoiding these mistakes in the first place will help you grow with less pain and more profit.
Created by Ryan Mason
Here are some common cash flow mistakes to avoid when scaling:
Going on a hiring spree
It’s exciting to go on a hiring spree to grow bigger and faster. It’s just not a good scaling strategy. You could burn through millions quickly and not realize the implications until it’s too late. Laying off people is a very painful experience, both emotionally and financially. To scale, you want to hire with baby steps. First consider hiring independent contractors, freelancers, interns or part-time employees. Then, once the growth direction is tested, you keep the best and start hiring more.
When you decide to hire contractors, take a few extra steps to ensure you avoid the IRS risk of hiring employees vs. contractors. Even so, working hard by itself is not a strategy. Automating your business processes can help you pick up speed alongside your hiring plan. Leverage technology to help stretch your budget and ease your burn rate.
Stocking up on inventory
Use your numbers to guide you. Know your inventory turnover, inventory on hand (do the actual count), drop ship option and stock up accordingly, in small batches. Trends change rapidly nowadays, even if you think you know the market. When you overstock and your items become obsolete, your saving on volume discount could be your biggest waste of your cash, time, and other opportunities. The true cost to you will be hard to measure at the end, so keep a sharp eye on inventory.
Ballooning overhead costs
When you have funding to grow and gain market share, you’re focusing on traction or sales. You can’t help but ignore your overhead costs and cash flow. After all, you’ve learned about tech unicorns growing fast before even making any profit. You probably haven’t heard much of founders who burned through $50 million in a year or two and disappeared completely. The culprit is the overhead. For example, when you expand from your shared office to a large office, all of a sudden, your fixed costs including your rent grow faster than your sales and the way you can manage your cash flow. To scale up and sustain your growth, you need to make your overhead as lean as possible.
Using credit card balance to fund your growth
Even if you make a profit margin of over 50 percent, using credit card balance to fund your growth is still an expensive option. A personal line of credit, a business line of credit, or a small business loan with a personal guarantee are better options than using a credit card. Private loans or investment are also good options. The key is to build a relationship with banks (or potential investors) and get the other options set up before you need it. A last-minute loan is possible when you can walk into a bank with a significant order from a customer, along with your strong persuasion and negotiation skills.
Expanding to other markets quickly
The success in your home market may give you the confidence to expand quickly to other markets. If you don’t have enough research on the target market in term of trends, culture, regulations, costs, etc., you’ll be surprised by how fast you could burn through your cash. International expansion mistakes are not unique to startups. Even large companies like Starbucks have made such mistakes. To scale your expansion, you want a plan and a budget based on your research. You want to test your market with options such as partnering with local players, starting with one location, one office, testing with one channel partner, and grow from there. Branding alone doesn’t automatically help you expand.
Avoiding these 5 cash flow mistakes when scaling up will help you sustain your growth. After all, playing the long game will give you more cash to have around to fund your moves and scale your growth.