Cash Needs

When starting a business venture I have never seen an entrepreneur (including myself) estimate cash required for a venture any where close to what actually happened. The inherent optimism of being an entrepreneur automatically seems to dictate that cash needs will be underestimated. By the way, most venture capitalists, angel groups and private investors whom you generate interest to your venture know this. I have spoken with many investors and investor groups and they tell me they basically throw out the window whatever the entrepreneur projects for cash needed. The problem is that underestimating cash needs at the beginning of a business venture creates cash flow problems somewhere down the line. Because entrepreneurs always underestimate cash needs, the search for money needs to be consistent and continuous. However it is always wise to take the money you think you need and double it. It is also wise to have someone on your management team or better yet outside your management team who is good with numbers and forecasting challenge the entrepreneur’s projection of cash needs. I cannot over emphasize the need to overshoot your cash need projections otherwise you are almost certain to undershoot them. Even if your cash needs are conservative you still need to constantly look for more money. As I have said many times, since cash flow is the life blood of any business it is critical to make sure your cash supply is always right.

Starting A Business

When Starting a Business unexpected events can cause cash flow problems. All of the forecasting tools in the world is not going to catch this one. No matter who you are and no matter what business you are in, I am telling you that by virtue of the fact that you are in business something always happens in a business that you never expect. By the way, something unexpected usually happens more than once. These unexpected occurrences can put you out of business and they are inevitable. This is why your salary needs to be conservative; this is why you need to constantly cut overhead, this is why you cannot withstand slow paying customers, this is why you have to be on guard for employee theft, this is why you have to manage your debt and this is why you have to make decisions proactively versus reactively.

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Employee Theft or Embezzlement

Let’s talk about one cause of cash flow problems that turns every entrepreneur’s stomach, I know it turns mine and that is Employee theft or embezzlement.

Most business owners never think it can happen to them. Someone they trust needs money and has figured out a system for stealing and embezzling. It happens a lot more times than you think. By the way 80% of business theft is employee theft while 20% of business theft is customer theft. The key is implementing checks and balances and making sure one person doesn’t have too much responsibility.

Here is an example:

I had a client who really trusted their bookkeeper. This bookkeeper did everything. She did the entire bookkeeping job, made bank deposits, prepared payroll, recorded sales transactions, entered accounts payable, printed checks and prepared quotes. She had no watchdog, there were no checks and balances and she did everything. She just bought a new house and was having problems making payments on the mortgage. It appears she overpaid for the house beyond her family’s means and did not want to go into foreclosure. She understood that she literally controlled the company finances and the temptation to steal was building. The owner had two companies of which one was dormant. She began by writing extra payroll checks out of the dormant company. No one knew as no one audited or oversaw the dormant company. Then she got lazy and simply wrote checks to herself out of the main company account. The theft was discovered but not until several thousand dollars were stolen.

Sometimes the temptation to steal gets too great and people with weak characters give in to the temptation. Never have any one person assume this much responsibility. Have a professional financial person, like a CPA or part time CFO review the books at least quarterly and implement internal controls to prevent theft and embezzlement.

I know there is someone in your business that you entirely trust, unless it is a family member you can never be 100% sure that they are not stealing. I am not saying you go and assume everyone is stealing, but you must be aware that employees are human beings and if they are faced with a temptation to steal and they have personal problems where they need money. You simply cannot be sure.

Other ways for employees to steal includes putting inventory in dumpsters and picking it up after work. Putting inventory in duffle bags, using dressing rooms as a tool to stuff product in a bag or inside clothing, wearing merchandise under other clothing, accepting cash from a customer and not ringing it into a register and throwing away a sales slip. You never live long enough to see all the ways an employee can steal, but I have seen a lot of them. Get the necessary controls for your business to reduce employee theft.