I was going over a business plan with one of my students ( I am teaching Entrepreneurship to a Masters of Management program for my alma mater and getting a kick out of it!).

He had a great business plan, but there was something that I felt he did that was extremely risky that could also be food for thought for would-be entrepreneurs.

He was risking virtually all his savings to build up a fast food restaurant.   Not only that, he was going to borrow an amount that was twice his own money to fund the remaining amount.  What’s more, in order to be able to build the restaurant, he was going to build the restaurant on a lot that he proposed to lease - as a way to lessen initial investment and a way to get a better location.

He had a great concept of the restaurant, and that was a busy thoroughfare, and there was very good possibility that the business would do well.  However, there was one thing that I noted.

First, after building the restaurant on a rented lot, and equipping the restaurant, he had only enough money to fund 2 months of working capital.  He was very confident that business was going to be doing well, and that it would be enough cash.  BUT, and for entrepreneurs, knowing the BUT is important…

What if the restaurant did not ramp up as fast as he has projected?  There was a very big chance that he would run out of money.  And carrying already a loan that was twice his capital, there was not much chance that he could get further credit. 

What would happen if he runs out of cash, and then he could not borrow?  Not only would he endanger an otherwise good business, but that may meant he would have to forfeit the building that he had constructed over a leased lot if he could not move the business forward and pay the rent on time.

It is great to start a business, and most of the time we wax optimistic on the business prospects. But while we continue to look at the bright side, it is always well to plan ahead when things don’t go well.  And one of the things you always want to prepare is to make sure that you don’t run out of cash!  Many a good business had to stop operations, not because  they were not viable, but they run out of money to fund short term obligations.  You may have read great stories of entrepreneurs who risked their all by funding their enterprise through their credit cards.  It is a romantic twist, but believe me, that in these time and age, there is no such need for such a risk, and only few blaze the success to tell the story.

For an entrepreneur, the first thing you need to do is to understand what odds are against you.  It is the law of probability at work, and you want everything in your favor in any business. 

And when you encounter the situation of running out of cash, unfortunately, it could be game over very fast. 

Related Posts:

-Revisiting the Virtue of Being Frugal

-Are Formal Biz Plans necessary?

-The Importance of Basics in Management

-The Virtue of Being Frugal

-The Rule of 72

-The Goal of Entrepreneurship