By Ryan Himmel, Financial Partnerships, Xero North America
Financial problems are the primary reason businesses shutter. No matter how large a company is, cash flow is the irrefutable lifeblood of its operations. Poor cash flow can rip a company apart — forcing owners to make unthinkable decisions about payroll, creditors and order fulfillment.
The near-bankruptcy of Tesla nearly a decade ago proves the importance of cash flow awareness. The company’s founder, Elon Musk, once explained that staying on top of your cash flow is crucial, because when you need access to capital the most, that’s also when it’s most likely you won’t be able to secure it.
The lesson is simple: constant awareness about when money is coming in and out of your business is vital.
Saved on the eleventh hour
Right when the financial markets were falling apart during the summer of 2008, Musk was trying to raise Tesla’s next round of funding. It was an understandably difficult time for the car maker.
Musk seemed set up for failure, as he was hunting for outside capital right in the face of the bankruptcy of General Motors — and fail he did in the end. He turned to his final option — to invest all his personal finances into Tesla. His personal situation was particularly dire because he had borrowed funds from friends for living expenses. If Tesla’s position didn’t turn around, he would have been in deep financial trouble.
Luckily, Musk managed to close on financing from company investors — at the eleventh hour: 6PM on Christmas Eve, 2008. He says that his willingness to invest everything he had convinced his other investors to put up half of the money he needed to keep Tesla alive. It was just in time — he says the company would have gone bankrupt a few days after Christmas otherwise.
How to avoid it happening to you
But what can you learn from Musk in order to avoid a potential devastating cash crunch? Without a crystal ball, it’s unlikely you’ll be able to predict large macroeconomic events or global financial crises.
Lacking the ability to see into the future, establish emergency funding mechanisms long before you need them. Putting in place safeguards like an overdraft facility will help you survive the unexpected.
Use cash flow forecasting software like Float to create ‘scenarios’ to model what your bank account will look like based on different factors. Make a contingency plan for if sales ever drop and assess how you can tweak your operations and expenses in this scenario.
If your business is funded by venture capital, raise before you need to. Raising when you don’t look desperate means you’ll be able to negotiate better terms and attract smarter money.
Additionally, strict terms of trade help keep cash coming in the door — set them up early and stick to them.
When it comes to capital, you never want to be scrambling to secure it. Look for funding when things are good, rather than when you’re in a pinch, to keep your business cash flow positive.
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