Cash Flow Really Is King: I Learned the Hard Way

  • AUTHOR: Peter Chen
  • DATE: 05/14/2012

At 23 years old, I started Infographic World,   a data visualization company working with brands to tell their story in   a more visual and effective manner. It doesn’t matter that I’ve   practically studied business since childhood or that I have an MBA—there   is simply no greater teacher than failure. I’ve had to acknowledge this   truth more times than I can count.

My first lesson came about 10 months into starting the company. At   the time, I had virtually no systems in place to track money: how much   was coming in, how much a job would cost, how much I would eventually   need to pay vendors, etc.

More importantly, I never stopped to think about the payment terms I   was offering my clients. In my head, I had been conducting a fair amount   of business, so the money would come in whenever it came in, and I   would be fine as long as there was a nice, comfortable amount of money   sitting in the business bank account. To make matters worse, I always   wanted to pay my vendors, so whenever I received an invoice, I would cut   a check immediately, every time.

Article is continued below

On a particularly fateful Friday, I was printing out the invoices   that were in my inbox. For some reason, a lot of my jobs had come to a   conclusion around the same time, which meant that there were now a lot of contractors that needed to get paid. I laid out all of the invoices   on my desk, added them all up and wrote down the total number. Just   before I began writing out the checks, I randomly figured that I should   check my bank account balance and see what I’d be left with after paying   these vendors on time, like I always did.

The next moment was one of the worst feelings I’ve ever had in my   life—my bank balance wasn’t enough to cover the amount I had promised my   vendors. It wasn’t even close, actually.

I closed the office door and sat there at my desk with a pain in my   stomach that completely overwhelmed me. For the first time in my life, I   felt like a complete and utter failure. How could I have been so stupid   to allow a situation to arise where I had to pay out more money than I   actually had in my bank account? I didn’t want to upset my vendors; they   were the lifeblood of my company in terms of producing something for my   clients. In my head, my business wasn’t going to survive the next 30   days.

I decided to visit my parents’ house that weekend and speak with my   father, who has always been a mentor of mine and someone in whom I   confided in times of trouble. I explained my situation and we sat there   for hours, discussing what caused the problem and different ways to   remedy it in the future.

With a hard look, I realized that my first problem was obvious: I   wasn’t enforcing any sort of payment terms with my clients, and I was   paying my vendors too quickly. Essentially I was paying for jobs long   before I was actually being paid for them—a model that will eventually   catch up with you, as I’ve learned. I proceeded to set up new terms both   for the clients and the vendors: I began to require a certain   percentage of money up front from the client, and also came to an   agreement with vendors to pay them in a manner that’s more realistic for   me as a business owner.

In order to enforce these new policies and prevent myself from making   such a great mistake again, I found that I also needed a better way to   track what money was going in and out of my company. My father insisted   that I set up a “reserves” bank account for my business: whenever money   was received for a job, I would set aside what I knew to be the future   costs of this job into this separate bank account. This way, regardless   of when the job got done, the money that would be needed to eventually   pay the vendor would always be there.

This truly was my great mistake, but what matters is surviving it — and learning from the experience.

  ABOUT THE AUTHOR:
Lineage2, Aion, Blade And Soul

StartupNation Free Launch Assessment! Get Started Now