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The Pitfalls when Starting a Business

The "VALLEY OF DEATH" - When Starting a Business

The "Valley of Death" is a recognised business term for situations in business where money is going out faster than it is coming in, and if you charted it on a graph, it would show clearly "The Valley of Death" - see diagram below.

The Valley of death is particularly pertinent to start-up businesses where it may take many months to experience income revenue, but and the cost of starting the business start to mount up.

When a new business starts up it will generally have many costs before it has income. As the business starts up and costs are incurred without any sales coming in, then your bank account can take a hammering. This is where you are faced with the "Valley of Death" and if income doesn't arrive before cash runs out; then your business goes broke.

The challenge almost every new business faces is to travel through the Valley of Death and get to the other side without the business dying.

The Valley of Death can be seen from two perspectives both in a graph of the Closing Bank Balance in the Cash Flow Projection, and in the Cumulative Profit/Loss in the Profit/Loss Statement. It takes immense courage to pass confidently through the Valley of Death.

The secret of coping with The Valley of Death is to acknowledge and respect its existence.

Secondly you must ensure you have a Cash Flow forecast and that you constantly monitor what your cash needs are going to be as time passes.

Keep at least three Cash Flow Projections:-
(Easy nowadays with Excel spreadsheets)

* Worst Case Scenario,
* Optimum Case Scenario and
* Best Case Scenario.

This way, you will always know well in advance if a cash problem is looming.

Once you spot a looming cash flow crises a few weeks in advance, then you have three choices; all of which should be viewed as business challenges to be overcome, rather than a nightmare crisis:

1. TAKE STEPS TO INCREASE REVENUE

This might mean reducing your prices temporarily by having a 'SALE', or risking spending money or advertising or promotion, or offering special deals, or chasing people who owe you money. It might mean selling off unused assets such as machinery and equipment.

2. TAKE STEPS TO DECREASE EXPENSES

This might mean laying off staff or cutting their hours. It might mean moving offices to a cheaper location. It will certainly require you to go through every expense the company has to find ways to reduce some of them. It might mean downsizing your car to a smaller and more economical model.

3. TAKE STEPS TO FIND ADDITIONAL FUNDING
This could mean that you have to inject more capital into the business or seek a bank loan or government grant. Maybe you could find an investor who like to takes shares in your business?

Information provided by John Edmonds  - http://www.getaheadinbusiness.com 
Copyright 2009 John Edmonds