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Tuesday
Jan292013

CEO School: Don't Waste Your Investor's Cash

CEO School is a series of posts that are aimed at helping founders of direct selling start ups with the principles of knowledge they must possess in order to build a successful direct selling business.  This is Part 5 of 23.

This post is about debt.  It's a wicked four letter word.  There is good debt, and then there is bad debt.  Most debt is bad debt.  You can call it an investment for a while, but that only lasts for a time, if and until you begin to see a growing revenue stream coming in as a result of the investment.  After that, it's about how long you take to convert your good debt to the profitability stage.  And if you don't, it will become bad debt.  And then your company will most likely be one of the ones that does not make it.

So you've got an idea,  you think it's foolproof  - and you are aiming to "invest" in all the bells and whistles you think you need to make it work.  I advise you to revise your plan.   Taking investors' money means being a good steward of another person's cash.   Don't waste it on things that will not lead to sales.  Revise the plan.  Don't ask for $250K, when you really need $475K.  A good investor would spot that, and never allow their $250K to be at risk.  How much cash will you burn through?  

Over a month ago, a direct sales start up company needed an extra 5K because it was in a cash crunch.  Looking at the financials, I spotted that their monthly cellphone spending was over $6K.   I advised them to switch to Google Voice, or SendHub in order to lower their costs.  This month their spending was under $200.  They were able to save thousands without having to risk investor capital, or the direct sales start up, by giving up more control.  

Rule #1: Never lose money. Rule #2: Never forget Rule #1 - Warren Buffett 

Or how about the expense that you think is really an investment - that has nothing to do with what you are selling?  One entrepreneur I know was buying hockey tickets because he thought it would help him conduct business.  He never got a sale from those "prospective customers".  Needless to say, he no longer has any of his original partners.  Wasting cash is something an investor will never forget.  

I mention this for one reason.  Ventures may be successful, and some may certainly fail.  That is the risk investors take when they invest their money.  If you swing for the fences and miss.....  it's okay.  But if you step up to the plate, dissheveled and with your shoe laces untied....  don't expect to play ball much anymore.  

I recently visited Mount Vernon to see the home of our first President, George Washington. That got me started on Ron Chernow's Pulitzer Prize winning book, George Washington.  Two facts I learned reading this book is the entire time Washington was leading the Continental Army and during all his years leading the country, he always concerned himself with the running of the business at Mount Vernon, and he was always looking for new ways to increase the revenue side of the business.  The second fact is how much Washington hated debt.  That lead him to support fiscal policies that would strengthen the revenues of the new country, and, at the same time, minimize debt.


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