The Problem of Having Too Much Cash
The economy is righting itself and investors are once again ready to take risks. The start-up industry is awash with cash. Aside from the traditional venture capital firms, hedge funds, and angel investors, other money sources are on the hunt for good ideas and good deals. Now should be a great time for entrepreneurs. And it is. However, there is a danger that comes with getting too much money from your funding source: the temptation to quickly burn through it.
Having too much cash may seem counter-intuitive as a problem. One of the biggest difficulties faced by anyone trying to build a business is raising enough capital during funding rounds to keep it going. The trouble is that if you get too much money you may become used to high spending, and when a downturn comes, as it inevitably will, the adjustment you’ll have to make will be painful.
An article in Inc. magazine discusses why having too much cash can be a problem. If your revenue is high because your spending is high, you’ve probably put the company on an unsustainable path. When difficult times come, you will have to cut spending, which will lead to shrinking revenues and profits.
If this happens investors, who have gotten used to high returns, may seek to have you removed in the interest of ‘protecting the company’. Such persons or institutions may not control the company, but they may have enough power and influence to remove you, the entrepreneur, from your position.
You need to anticipate this problem and deal with it. The best means of doing so is to develop the habit of financial restraint. Plan and spend as though it were always lean times. You can of course take advantage of an opportunity to get a large amount of cash during a funding round. However, such money should only be used for a specific purpose—to service a debt or make a well-thought out investment.
Don’t take the money just because you can. You should always endeavor to think lean and to be moderate and wise in how you spend.
About Christopher Reid Chris was born in Washington, D.C. and lives in Britain. He works as a blogger, essayist, and novelist. His first book, Tea with Maureen, has just been published.