The secret of good money flow

This story appears in the April 2018 issue of Mexico . Subscribe »

So you think you are ready to climb . The fundamentals of your business are solid, your income is rising and you are making yourself known. It's time to grow your team, increase your marketing, and maybe even move to a bigger space, right?

Not necessarily. Climbing is not just about increasing income , but increasing your income exponentially while maintaining the costs associated with increasing nominal income. It seems obvious, but neglecting this fact has sunk countless entrepreneurs .

The secret of good money flow
The secret of good money flow

They overspent on marketing without testing their product, increased their workforce without knowing how these hires would increase their income, and bought too much inventory. And, they ran out of money.

So what is the best plan for a startup with access to less than 500,000 pesos? “Don't spend money the same way a venture capital-backed startup would,” says Richard Jaffe, managing director of boutique investment bank Avalon Net Worth. Instead, create a growth plan and finance it from your own business. This may require several different measures.

“First, before you have used up your 10 credit cards and used your home and car as collateral for a bank loan, you should look for money anywhere you can find it, such as factoring,” he says. This is when a bank or a specialized financial company pays you instantly for the invoices you have issued and that you expect to be paid in 60 or 90 days.

Jaffe has seen startups get 70 cents for every dollar, while others received 99 cents for the same amount. To find the one indicated for you, the expert recommends checking the institutions that are advertised in specialized magazines of each industry, so that they are familiar with your market. In Mexico you can approach the Mexican Association of Financial Factoring and Similar Activities (AMEFAC), the Mexican Association of Financial Societies of. Leasing, Credit and Factoring (Amsofac) and the Mexican Association of Specialized Financial Institutions (AMFE).

Use your inventory

Some startups may also need to obtain some asset-based loans, using their inventory as collateral. Your lender may realize that, for example, your 35 tons of cocoa is valuable, but it will be even more valuable if it is a chocolate bar. They will lend you money against raw materials, you use it to finance production, and then you use the profits from the finished product to pay off the loan and something else.

Depending on your business, you can optimize your liquidity in other ways. Jaffe suggests persuading retailers to pay for orders in exchange for a discount, rather than when they sell your products, or to create a strategic manufacturing alliance with a manufacturer. “You could even come to an agreement that a provider only receives payment once your customers have paid you,” he says.

Why would your partners do this? “It's about the confidence these other parties have in your product,” says Jaffe. “If you have a fantastic product, retailers will want it. Their own interest will echo with yours.”

Matt Jung, president of the New York-based fashion industry business incubator TrendSeeder, points to someone who clearly worked in these angles to his advantage. This is Sarah Kauss, who turned S'well, a reusable water bottle brand, into a company with $ 100 million in annual revenue after just seven years.

“Kauss created a high-quality product, finding a way to do it cheaply in China and then sell it at a very good margin,” says Jung. And the more bottles he bought, the better his relationship with his supplier became, empowering him to negotiate better terms as needed.

It's about making sure that every peso you spend contributes to being profitable. That, says Jaffe, should save you from trouble later. “Nothing is more exciting than growing a successful business from scratch,” he says. “You just have to remember that everything takes much longer than you might expect, and that it also costs much more.”

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