Page 141 - 6 Secrets to Startup Success

120 6 SECRETS TO STARTUP SUCCESS

planned, doubling our staff and doubling our sales? How would this
affect cash flows? Or what if we launch much more conservatively,
bootstrapping our way to growth? What kind of capital would each
scenario require and at what times? In this way, you can spot potential
trouble spots, as well as unexpected windows of opportunity, far
enough in advance to do something about them.

To guard against the common tendency toward overly optimistic
projections, you will be wise to run best-, mid-, and worst-case sce-
narios for your sales and expense projections. Lynn Ivey encountered
three major negative forces as she attempted to get The Ivey up and
running: a grand opening that occurred six months later than pro-
jected, a first year of sales that fell more than 90 percent below pro-
jections, and a steep recession that started a year after she launched.
She never seriously factored these scenarios into her planning, and
instead relied on a single, optimistic view of the future. When these
events unfolded, she had no strong contingency plan.

Third, your pro forma will train your eye on the path to prof-
itability and key milestones along the way. One of these is the highly
anticipated day that you break even, the day you begin to generate
cash instead of burn it. Whether it’s projected to be in your third
month or your third year, your breakeven point has a kind of catalyz-
ing pull to it. Like a visible hilltop, it’s a milestone that you and your
team will strive to reach.

Finally, your pro forma projections will help you estimate how
much capital will be needed to get your business safely off the ground.
You can anticipate cash needs or crises and prepare for them in ad-
vance. By the time Lynn Ivey’s money became dangerously thin, her
initial funding sources were tapped out, and she had to scramble to
raise funds from a position of weakness rather than strength.

MASTERING CASH FLOW – Cash is like oxygen for a new venture, so
mastering cash flow is a pivotal challenge for all entrepreneurs. Joel
Kurtzman, through his extensive research underlying the book Start-
ups That Work, identified positive cash flow as one of a handful of crit-
ical success factors for venture success and a key driver of
longer-term value creation.7

American Management Association • www.amanet.org