The Silver Bullet of Cash Flow

It is rare that a day goes by without me hearing from entrepreneurs about cash flow concerns. Some have a “take-over-the-world” idea, and their lack of venture capital is the only thing holding them back. Others are expanding, and their cash flow never seems to catch up to growing expenses. Still, others are suffering operating losses and need cash to bridge them to profitability. Whatever the exact reason, the need is the same — cash on hand.

Getting funding can be tough, whether you’re pursuing investors, a bank loan, or bootstrapping via family and friends. But there is a silver bullet that will lead you to the cash you need to fund your business — paying customers.

Yes, the silver bullet really is that simple, with one general disclaimer — you have to have a decent business model that leads to profitability and, ultimately, self-sustainability.

1. Get Funding from Your Customers

Some of them may even be willing to pay you in advance for the products and services they desire. Don’t hesitate to develop your pricing and invoicing strategies to accelerate your cash flow as much as possible. For example, allow customers to pay for one or multiple years of services or products in advance for a modest discount.

2. Add Customers Now, Features Later

A commonality between the bootstrapping and lean-startup movements is this concept: Building out the features of your product or service just enough to start gathering paying customers, and then using profits from those customers to carefully add more features to attract more customers. These companies continue to repeat this cycle, sometimes for years.

3. Customers Can Improve Your Valuation

If you still need cash once you get everything directly from your customers, you are in prime position to find additional funds because you have cleared the “proof of concept” stage and broken into the coveted “paying customers” stage of financing a business. Why is it coveted? Because your business-funding options significantly increase at this point.

Why did your funding options increase? Because your risk just went down. Getting individuals or another business to actually part with their hard-earned cash for your product or service is a milestone in your progress. You now represent a more calculated risk, and your valuation goes up as well. In fact, the more satisfied, paying customers you have, the better your valuation. Repeat customers are even better.

4. Friends and Family Will Notice

Friends and family will feel better about financially helping you, and you will feel better about taking their money, knowing your chances to repay the money have improved.

5. Business Plan Competitions are in the Bag

Have you ever been to a business plan competition? Have you noticed who usually wins? It’s usually one of the plans that has become a real business and has real, paying customers. And business plan competitions can be a great source of startup and growth capital, both in terms of the prize money and free services, as well as the financing relationships that usually follow the winners.

6. Angel Investors Love Customer Feedback

Did you know that angel-investor due diligence usually focuses on customer feedback? Angels know your business plan is a best guess and your financial projections are so full of not-yet-validated assumptions that it is obsolete within hours of its completion. They will ask for a list of your customers, and they’ll likely call a bunch of them. Paying customers are the best way to convince investors to open their checkbooks along with an “A” management team, a strong business model, and a definable and sizeable target market.

7. Banks are More Likely to Loan

Banks like to loan money to companies with paying customers — the more the better. Whether the bank is financing working capital (which is often collateralized by the amount of money your current customers owe you) or equipment, they almost never make a loan to a company without paying customers.

8. Even More Financing Options are Open to You

Paying customers can create several other financing options, including invoice factoring, PO financing, inventory financing and more. Without paying customers, none of those would even be an option.

9. Investors Will Notice

Private equity, venture capital, and even IPO investments are primarily about one thing — paying customers. Without them and the ability to demonstrate how the investment will directly and exponentially increase the volume of paying customers, those deals usually fall apart very quickly.

So, You Need Cash?

If you need cash, then you should ask yourself this one question: “Am I doing everything I can to keep my paying customers and acquire new ones?” If you hesitate in any way to answer yes, then you should start your financing strategies there with specific focus on reasons number one and two above. If you still need money once you’ve exhausted those options, then you can focus on reasons three through nine and leverage your paying customers into additional financing.

If that still isn’t enough cash for you to succeed, then you may need to revisit the viability of your business idea and model. I just don’t know of many companies that have run out of cash because they have too many paying customers; their failure is usually the result of another problem with their management or execution of their business plan and financing strategies.

By Ken Kaufman

Jan 28, 2011

Ken Kaufman, Founder & CEO of CFOwise®, serves as the Chief Financial Officer for a dozen startup, emerging and medium-sized businesses. With almost two decades of experience and as an adjunct professor and author of Impact Your Business, Ken focuses his professional efforts on helping entrepreneurs obtain clarity and improve cash flow with the six scoreboards every business needs.



One Response to The Silver Bullet of Cash Flow

  1. […] Continue reading here: The Silver Bullet of Cash Flow « Homepreneurs's Blog […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: