The question most entrepreneurs get wrong and pay for with their business22nd May 2019
In my last article, I posed a question...
At which stage are businesses most likely to go into liquidation, without ever seeing it coming?
There were three choices:
- Infancy – This is when you are in the startup phase. You alone are CEO, bookkeeper, assistant, salesman and office manager, at least until you can afford a small support team. Money is tight, but it is both an exhausting and thrilling ride as your business becomes established.
- Adolescence – Your business reaches a turnover of £1 million or £2 million, and business is booming. You need more staff, office space and equipment to handle all the work, and invest in the infrastructure necessary to scale.
- Maturity - Your company is established, has momentum and runs well without you. You can exit if you like… Or focus on big strategic issues.
So which is the danger phase? Many of you guessed infancy, which makes sense.
After all, a vast number of businesses never make it beyond their first year or two. But if you do run out of money as a startup, most business owners are not surprised. It’s almost par for the course.
So the answer is actually…
The middle, adolescent stage!
In business-building, as in life, the most dangerous challenges are the ones you never see coming.
And in this phase, you probably feel very secure.
After all those years of struggle, work is finally rolling in. You are developing a growing reputation, and every week, you get high-quality enquiries that you know will turn into new business. You start to relax…
You spent years working from early morning to midnight, to get everything done. Now finally you have a solid team to support you.
And your personal income has grown, too. All those nights you spend wondering how you were going to pay the bills are a distant memory.
The problem is that this high-growth phase involves a lot of outgoings.
You have to pay for more people’s salaries…. Buy more equipment… Perhaps even rent a bigger office.
As new customers come on board, you might have to lay out significant money to buy materials or to pay your staff, before your new customers pay you a penny.
Yes, customer orders may be pouring in and you may have just landed your biggest customer yet. On paper, your business looks healthier than ever.
But there is a big difference between receiving an order and getting paid – which might not happen until weeks or even months later. Slowly, a gap – and then a chasm – opens between accounts receivable and accounts payable……
…And one day, you wake up to discover that there is no money in the bank to pay staff or suppliers.
Your fast-growing business has become insolvent. In fact, it became insolvent precisely because it was fast-growing.
So why does this come as such a surprise?
Because you see that you are profitable on paper.
This lulls you into a false sense of security about your finances.
By the time you realise how serious the situation is, it’s too late.
This is how entrepreneurs run themselves right out of business. I’ve seen it happen time and again to smart, passionate people just like you.
Unfortunately, in this delicate middle phase of growth, intelligence, drive and dedication are not enough for success.
It takes something else…. ….which I will reveal in my next article, so please do watch out for it.