If you’re a CFO, this is probably obvious to you, but more people lose sight of this than you’d think. Run your business with cash efficiency always on your mind.
Many people often forget the valuable lesson taught to us as children, that if you have $20, you don’t need to spend it all on Twix bars at the candy store. Similarly, if you raise a million dollars, it doesn’t mean you need to spend it all immediately. One of my first clients had raised $250k shortly after I helped them organize their finances, and within a few days I had three different employees out of the sixteen that worked at the company come up and demand a raise. When I questioned them about it, their response was “well, we just raised $250k so I should get some of that.” Never mind that this company was losing $100k a month and the $250k was a drop in the bucket compared to what was necessary.
Saving cash for a rainy day is one of the most overlooked things for a small business. Deals fall through. Partners disappear. Investments don’t happen. No matter who you talk to, regardless if they have the most amazing company on Earth, it happens. I’ve always told my small business clients they should have at least 3 months of cash in the bank, and ideally 6 months. Investors, board members, and anyone else involved will also want to see you saving for a rainy day. Obviously they want capital to be deployed and generate a return. But, even moreso, they want you to not run out of cash. A company with less deployed cash is worth more to them than a company that goes bankrupt.
Investors will rarely buy into companies that don’t have cash, and if they do, the terms that they offer will not be pretty. I’ve seen VCs who know a company has very little cash on hand drag out a deal until that company has no other choice but to accept very unfavorable terms. Granted, these types of underhanded VC practices aren’t widespread, but they still happen. Don’t put yourself in that position. Small businesses have more financing options than you think, whether it be debt, investment capital, or a combination of both. I’ve seen many many entrepreneurs not pay themselves so they could have enough money to pay their employees and while admirable, it’s a pity to see. I’ve participated in conversations where CEOs have to tell their employees they don’t have money to pay them and it’s never easy to stomach. Don’t bring in help when it’s too late for them to save the situation, and don’t spread yourself so thin that you can’t operate the business you poured your entire life into.
The old saying that "you have to spend money to make money" is true, but only to an extent. Make sure you're burning your capital wisely, and keeping enough saved up so you don't end up behind the 8 ball.