The success of some startups (especially tech startups) have painted a really nice picture to youngsters these days, everyone jumps onto the bandwagon and hopes to be the next Grab or Alibaba.
While we applaud to those who have made it to the top, we must also look at those who didn’t make it, whether they are still struggling or they have completely disappeared from business. You may not want to be copying any strategy from them but at least don’t repeat the mistakes they made.
Products/Services, which are not important
Good products/services are those that are solving existing problem(s) and/or delivering additional value to its customers. Many startups are overly passionate on their product’s features but have failed to understand the difference between “good to have” and “must have”.
If your products and services falls under the “must have” category, congratulation. Your customers are willing to pay any price to either get rid of their current pain or to secure the value add (until your next stronger competitor comes in). A typical example is UBER, whom was once seen as the best solution to those who were struggling with the public transportation system. They did so well, until GRAB came in and took over their market shares.
But if your products and services falls under the “good to have” category, you are not dead; you need to do a lot more in order to stay in the game. “Good to have” are referring to those products and services that give superficial value which are not essential nor is of their priority. Typical examples are luxury products or entertainment. Some services may be of luxury to one customer, but is essential to another, so it really depends on the scenarios. For Instance, branding services may not be the priority of a small business who are struggling with cash flow issues, but critical to the big brands within the automotive industries, where they spend millions of Ringgit to reach out to their target segment(s).
One must also understand that it’s not the quality or features of your products/services that determine your business survivor-ship, but whether your products/services are needed by the market. Therefore validation of your ideas at the beginning stage is really important. If you have a bit more budget, I suggest that you do a small market survey instead of designing your products/services in your own silo.
Monetization
Social enterprises are mushrooming these days, and I’ve seen many social entrepreneurs sharing their ideas and dreams in various talks and events. When I sat down with them, most of them look exhausted. Besides running the business with limited manpower, they have to be busy running around looking for sponsorship/donation. The profit they have made from the business are channeled to support/solve social problems, thus left with very little working capital to run the operation. The general perception of “Social Enterprise should not make profit” is probably one of the main reasons why many social enterprises are struggling. ‘Social Enterprise’ is a business, they exist as a business so that they can generate profit to solve social problems. By relying on donations or sponsorship alone is not going to make them a “Business”. Therefore social enterprises should create a business model that allows monetization from their day to day business operation rather than fund raising. To do this, they have to think like a business, study the market, design products/services that’s needed by the market, rationalize their costs, marketing and etc. If there is one thing that they should change, they should stop thinking like a charitable organization.
Poor cash flow management
Many startups are overly focus on the profitability ratios, ROI, valuation and etc, but have forgotten that most businesses collapse due to cash flow issues. I used to ask this question to startups “If you purchase a product at RM10, will you sell it at RM8?”. Most of them answered “no”, which I’m not surprised, but when I continue “what if this product already in your store for more than a year?”, to my surprise, half of them will still say “no”. Don’t get me wrong, I’m not proposing discount to cut lost, but I simply want to gauge how much they pay attention to cash flow. It’s very naive to be protecting your Profit and Loss Account when you don’t even have money to pay your utility bills and salaries. The big boys can afford to keep inventories simply due to the cash reserve they have, they don’t mind keeping the inventories for years. Worst comes to worst, they can convert that to donation expenses without affecting their gross profit margin, but can startups or small businesses afford this?
In cash flow management, we pay attention to the cash conversion cycle. This simply means the followings:
Creditors turnover period (in Days)
- how long do you take to pay your supplier upon receiving of goods? (say 30 days)
Inventory turnover period (in Days)
- how long do you take to sell off this product? (say 90 days)
Debtors turnover period (in Days)
- how long do you collect from your customers upon delivery of goods? (say 60 days)
In above example, assuming you received your goods on 1 Jan, you sell it 90 days later (30 March), and collect from your customer on 30 May. But take note that you need to pay your supplier by 30 Jan, so technically you have paid your goods 120 days before you can collect money from your customer. So the question is very simple, can your business survive without incoming fund for 120 days (which you still have to pay your commitment).
If your business has a conversion cycle of 120 days, bare minimum you need to have working capital to cover your fixed expenses for that 120 days. You can’t expand your business without the ability to settle your business overheads.
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Article can be found in Entrepreneurs Insight magazine, May 2018