Looking Good, being Cool, and going Downhill . . . FAST!
A number of years ago I investigated the possibility of acquiring a food processing company. The company was about six years old at the time and was owned by two people. One was the production expert who originally started the business and the other was a wholesale food distributor who bought into the company after it had been going a few years and needed an injection of capital.
The products produced were gourmet food lines of excellent quality and sales had been increasing strongly since the involvement of the wholesale food distributor. In fact he was the major customer of the business who took more than 75% of everything that was produced.
The advertised reason for the sale was that the wholesaler wanted to reduce his shareholding and free up funds for other business activities. The production expert, a dynamic young man was intending to stay in the business.
He had developed plans for the relocation of the plant and the purchase of a considerable amount of new equipment which would take the business to “the next level”. This equipment was estimated to cost about $300,000 and the business was turning over almost three quarters of a million dollars. After spending a considerable amount of time investigating this business, I decided to walk away. I just had a gut feeling that the plans for the new machinery were too ambitious for the business given its current volume of turnover and spread of clients.
Recently I spoke to a person whom I had met while investigating this business and enquired how things had progressed with that business. He said: “haven’t you heard? A person who had retired from the soft drink industry sank all his superannuation money into it and upgraded everything. He spent over $600,000. They closed up shop a few months ago.”
I have seen many businesses live off their start up capital believing things to be going well. They buy new equipment, spend up big on graphic design work, printing and stationery and hire lots of staff. The owners make sure that they give themselves decent salaries and drive the latest cars. The early stage of the business is usually the development time when few sales are generated while expenses mount up, usually exponentially. Activity levels and enthusiasm are high while cash flow is skewed towards outflows rather than balanced in both directions.
Several months down the track it often happens that the sales have not come in as quickly as planned and that cash reserves are not adequate to last the distance. Often there is a time lag between the time that people are exposed to a product or service and when they actually order and pay for it. This time lag can be longer for young companies and can spell disaster if cash reserves are insufficient.
Recently someone I knew was forced to place his company into receivership. He told me that a large customer was about to sign a contract for the licence to use his product throughout Australia. The problem was that they had been promising to complete the contract for about four months but time was running out for this person. They simply couldn’t wait any longer. They ran out of cash before they saw the rewards for their efforts.
In the last twelve months I’ve had at least ten people approach me to help me with the marketing of my products. Most of them had elaborate plans to spend large amounts of my money with no certainty of a return. The risk was all mine. One of these people recently appeared on TV after his television marketing company collapsed leaving many customers without their goods and out of pocket as well!
One of the lessons that I have learnt in business and which has served me well so far is to ensure that you can meet your operating expenses out of your regular cash flow. Always seek to establish a buffer which you can use to expand your business without borrowing too much money. Keep your expenses as low as possible and make sure you operate profitably. If you want to be around for the long-term, make sure that you don’t simply live off your start-up capital since this will run out very quickly unless you can create strong cash flows quickly to replace it.
About Hans Jakobi
Hans Jakobi is an educator, author and public speaker. He is the author of five best-selling books including,
How To Be Rich & Happy On Your Income and the presenter of the Super Secrets to Wealth® do-it-yourself real estate investment home study course.
His educational materials are available from: Wealth Dynamics International Pty Ltd, PO Box 167 Portland NSW 2847 Australia
Telephone: (02) 63 555 800 Fax: (02) 63 555 855 Email: wealth@supersecrets.com
Website:
www.supersecrets.com
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