The last thing any business owner wants to see is a negative bank balance. Here’s how the founder of Infographic World went in the hole and how he successfully got out of it—for good.
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 account. To make matters worse, I always wanted to pay my vendors right away, so whenever I received an invoice, I would cut a check to them immediately.
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 the invoices on my desk, added them all up and wrote down the total amount due. Just before I began writing out the checks, I checked my bank account balance to see what I’d be left with after paying my vendors.
The next moment was one of the worst feelings I’ve ever had in my life. My balance wasn’t enough to cover the amount due to my vendors. It wasn’t even close, actually.
I closed the office door and sat 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 in which I had to pay out more money than I had coming in?
I didn’t want to upset my vendors; they were the lifeblood of my company and were essential in terms of producing something for my clients. My business was in danger of collapsing within 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 during times of trouble. I explained my situation, and we sat there for hours discussing what caused the problem, different ways to remedy it, and how to prevent it from happening in the future.
With a hard look, I realized that my problem was compounded: 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” account for my business: Whenever money was received for a job, I would set aside a percentage to cover what I knew to be the future costs of an upcoming assignment in a separate account. This way, regardless of when the job got done, I would always have cash on hand.
Running out of money was a mistake that could have cost me my business. But figuring out how to manage my funds quickly and efficiently taught me a valuable lesson: Always have more in your account than you think you need—and structure your terms so that you get paid before you cash out with your vendors.