Business Failure 9: Lack of Cash or Overextended Cash

This continues our series outlining reasons businesses fail so you can avoid them

Running out of cash may define business failure, as in “We’re out of money, so we’re going to close the doors”. In this post, however, we’re going to discuss how poor funding or mismanaged financing contributes to business failures. Many businesses begin with too little money and never overcome that hazard. Others possess enough money for well planned growth, but cannot support reckless overextension and growth.

Problems for Underfunded Startups

Studies indicate that most companies begin with too little cash. Startups receive their initial funding from any one of prime sources:

• Income from a full-time or part-time job
• Personal funds
• Family funds
• Credit cards
• Collateral based personal loans (including second mortgages)
• Small Business Administration guaranteed loan
• A wish and a prayer

Frequently business owners start their businesses knowing they have less money than they should, but hoping it is enough. Actual startup expenses regularly exceed anticipated budgets. Starting with less money than you forecasted, coupled with actual spending exceeding forecasted, quickly closes many new business.

Other business owners keep pouring additional money into their business in a desperate attempt to recoup earlier losses or resuscitate a struggling startup. The additional funds trickle in from other income, family, or other sources—too small to alleviate the problem—just big enough to keep the business going.

Overextending Finances

In addition, to starting with insufficient cash, you may overextend the cash you possess. Overextending means that you decide to do more in your business than your cash can support. Common actions that may overextend your cash include when you:

• Commit to a lease on office space you really don’t need
• Sell more product than you can produce or purchase with the money you have
• Open too many stores or locations in a gamble they all will succeed
• Hire too many employees (especially for seasonal or cyclical times, but keep them on afterward)
• Advertise through expensive and less productive methods
• Begin production on your idea, with expensive prototypes, with little feedback

Tuesday we discuss solutions to lack of cash or overextending your cash