There is an old banker’s rule of thumb according to which one assumes that bills will have to be paid sixty days earlier than expected and receivables will come in sixty days later.
Entrepreneurs starting new ventures are rarely unmindful of money; on the contrary, they tend to be greedy. They therefore focus on profits. But this is the wrong focus for a new venture, or rather, it comes last rather than first. Cash flow, capital, and controls come much earlier. Without them, the profit figures are fiction—good for twelve to eighteen months, perhaps, after which they evaporate. Growth has to be fed. In financial terms this means that growth in a new venture demands adding financial resources rather than taking them out. The healthier a new venture and the faster it grows, the more financial feeding it requires.
The new venture needs cash-flow analysis, cash-flow forecasts, and cash management. The fact that America’s new ventures of the last few years (with the significant exception of high-tech companies) have been doing so much better than new ventures used to do is largely because the new entrepreneurs in the United States have learned that entrepreneurship demands financial management. Cash management is fairly easy if there are reliable cash-flow forecasts, with “reliable” meaning “worst case” assumptions rather than hopes. If the forecast is overly conservative, the worst that can happen is a temporary cash surplus.
ACTION POINT: Develop “worst case” estimates of cash flow and cash forecasts for new ventures. Monitor receivables and inventory levels closely.
Innovation and Entrepreneurship
* Source: The Daily Drucker by Peter F. Drucker