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Raising and Spending Cash

Jeff Dennis, Founder, Cale Financial Corporation

Life is filled with dilemmas. We face difficult decisions each and every day. As entrepreneurs building our fast growth businesses with limited resources, the dilemmas that we face are compounded.

Typically our scarcest resource is cash. We never seem to have enough. We are constantly playing a juggling act as we strive to meet payroll every pay period, satisfy our suppliers’ payables, and chase after our customers’ receivables. In addition, we need cash to finance our growth so that we can build out infrastructure and hire the employees we will need to grow.

In my experience managing one’s cash flow is possibly the most important skill an entrepreneur can have. Let’s face it cash (flow) is king.

One of the most difficult dilemmas almost every entrepreneur must face is whether to:

  • Build out the infrastructure necessary to accommodate the business’s anticipated growth first or
  • Focus on revenue growth while operating on a shoestring and play catch up by building out the infrastructure later.

I have done it both ways.

When we were building our film and television finance business in the early 1990s, we were reluctant to build out infrastructure or hire too many employees because the sustainability of the business was based on certain income tax incentives that the Canadian government had in place at the time. We knew that with the stroke of a pen on Budget Day, the day the Canadian government announces its annual federal budget, the government could change the tax rules and effectively put us out of business.

Our approach was to sell as much product as we could while the incentives were available, while maintaining an extremely low fixed overhead. We outsourced as much as we could on a variable cost basis. It may have been a slightly more expensive approach. However, when the government did change the rules, we had filled our saddlebags with cash, and had very little overhead to carry while we retooled for the next opportunity.

In the case of FACES, a cosmetics franchise company that we acquired and restructured, we did it the other way. Prior to buying FACES, it was a worn brand and needed a facelift (if you pardon the pun). Furthermore, in order to sell franchises we needed to build out sufficient infrastructure to service their retail outlets around the world. We raised ten million dollars in two tranches and began building out the infrastructure. We redesigned the store concept, renovated existing stores, hired a management and sales team, built a trade show booth, and so on.

We grew to more than 125 stores in seven countries and were operating at a substantial monthly burn rate as we came within 50 stores of breaking even. We signed a letter of intent to open our store within a store concept in Wal-Mart’s Supercenters. Just as we went back to the market for the next round of financing, which would have taken us over the top, the dotcom bubble burst and we, like so many other companies at the time, were caught up in the meltdown that occurred in the spring of 2001. We found it impossible to raise more money and with our burn rate, we were quickly going through the money we had left.

The bottom line for us was that we were forced to put FACES through bankruptcy in order to stop the bleeding. It was a very disappointing outcome not only for us, but also for our employees, franchisees, and investors. We felt like we had carried the ball to the goal line only to have the clock run out before we could run it into the end zone.

In the intervening five years, I have had a lot of time to think about the lessons that I learned from the FACES experience. The bottom line is that I wish we had raised more cash when the market was cooperative. I also wish that we had been more cautious with the funds we raised. It is not that we weren’t responsible with the amount we raised. We simply were overly confident about our ability to raise more cash as we needed it. Factors beyond our control intervened and proved us wrong.

In researching my book, Lessons from the Edge, we heard the same message from entrepreneurs over and over again. Clearly, the key message about cash and cash flow is raising more cash than you need, and spend less than you have.

© 2006 Jeff Dennis. All rights reserved.

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