FOR CEOs ONLY: 乱世出英雄 How to manage the process of running out of cash

Today I got an email from a very intelligent young man born of a poor family in China who is wise for his young years. He sent me an old Chinese saying " 乱世出英雄", which translates into "The tumultuous times have the hero".

That was "spot on" as the Brits say it, for a recent conversation I had with a CEO. His successful company is moving through a valley of negative cash flow to the other side of the chasm where huge orders are waiting for delivery later this year to global giant customers. A nasty competitor is doing unethical things to make his life terrible in the meantime. The startup is forecast to run out of cash before the end of this year.

No, I am not writing about your company, so please spare me such emails.

But it is true, your startup will run out of cash during its first years of growth. So get prepared. You will not avoid the situation if you are successful and grow fast.

So here is my question of the day for you: "How would you manage your startup in such a condition?"

Consider these tips from veterans of startups, investors and serial entrepreneurs who I have learned from:

• Face reality. It is going to happen.
• Be certain. Sit down with your core team and work on the numbers. Expenses and revenue, equipment purchases and cash collections from customers and payments to suppliers.
• Mark the date when you will run out of cash. Tell everyone in your core team and board of directors. They will guess if you do not give them the date. And be prepared to answer that pesky employee who will ask you the question during your next all employees meeting.
• Have your numbers ready. Know your burn rate by memory, by month, especially the lumps for large purchases or slow collection of receivables.
• Don't lay off the receptionist. The small headcount cuts will save you only a mere few weeks of time before you run out of cash. Stupid is not wise. Keep the company free of dead wood and people who cannot keep up with the work load. Lean and mean is one way of thinking about this condition.
• Get everyone into action. When in cash flow trouble, create Operation Recovery. Give it a name. Build it with your core team. Focus on getting through the negative cash flow valley and over to the green grass of large orders on the other side. Everyone wants to contribute some special effort. They feel good when they do.
• You are not alone. You have people cheering for you. More than you might think. Get the whole startup working together on Operation Recovery. Delegate to your core team. Ask your investors for assistance and ideas. Talk to other CEOs. Your lawyers and CPA partners can be of help.
• Trust a Higher Power. These are times for calling on spiritual help. The personal pressure can break you. Veterans are wise and old for good reasons, including their acknowlegement that they call on their religious and spirtual sources when the valley of negative cash flow has gotten very dark, very deep and very scary.
• Remind yourself that the glass is half full. Global startups all have negative cash flow. For longer than they planned. Much longer. Your situation is not unique. People are in the same boat as you, around the world.

BOTTOM LINE: Plan on running out of cash. Then execute your plan. Get going. Worrying is not going to make things better. Gather your core team. Build your recovery plan. Be wise about what you say to employees and investors. Get the entire company involved. More help is better than you alone. Do not try to do a miracle single handed and in secret.You need all the help you can get, even including spiritual assistance. When you can manage running out of cash, you will have added one of the most powerful skills to your tool chest. Use it to build your unfair competitive advantage.

Comments

[ming]

thanks John for this great piece. Money is always a problem for startup companies.

I think the young man who send you the Chinese saying is really lucky to know you. And I'm sure he can do something great in the future under your guidance!