Don’t fall victim to the perceived power differential
By Allon Raiz
It’s ironic that managing cash flow – which is possibly the most important part of a startup’s survival – is often the most badly conducted part of a business. The first and most vital requirement for all successful startups is that you provide a product or service to a paying customer.
There are a number of reasons startups get their cash flow so wrong and some of these reasons are because of erroneous “myths about cash”.
I’ve seen many entrepreneurs get excited when they land their first deal with a corporate. They do the work in record time, over-promise and over-deliver, and once they’ve submitted their invoice for the work done, the waiting game begins. The first month passes by, followed by the second, and the third, and no payment is received. They were so excited when the corporate gave them business that they neglected to take the time to carefully negotiate the payment terms. The work is done but without the payment terms the entrepreneur has very little, if any, bargaining power.
Far too often entrepreneurs are quick to make excuses like: “They are the big guys and I should be grateful for this work. I couldn’t possibly bug them for the money. They have so many departments that probably have to sign off the payment, so I’ll wait until they have time to make the payment.” By being too afraid to confront the “big guys”, an entrepreneur’s cash flow quickly becomes an overdraft, all while the corporate plays the power game and exploits the power differential. Remember, money in their bank earns them interest.
I can’t stress enough the importance of discussing payment terms upfront and documenting them in writing.
Entrepreneurs perceive corporates to be far busier than they are themselves. This is a false perception because in my experience, corporates are no busier than you, the entrepreneur, who is running your own business. In fact, having to manage every aspect of your business daily makes you far busier than the corporate employee who only has to focus on the tasks linked to their job description.
Don’t buy into the myth of “busyness”. If you are owed money, bug the busy guy!
“They are good for the money,” is often the justification an entrepreneur will give you about their new corporate client. This isn’t necessarily true. Corporates often face the same challenges as small businesses such as market issues, cash flow issues and competition. They are just in a position to use more sophisticated terms like “re-structuring” or “budget cutbacks” instead of telling the truth and admitting that they are unable to pay you.
Fact: Value yourself
As an entrepreneur you must destroy these myths as soon as possible! You need to value your work, value your time and value yourself. When you have low self-worth, you will end up reinforcing the power differential between yourself and the corporate when entering into a deal. Go into a deal with a high level of self-worth and in doing so you will close the power gap.
Expectation management is extremely important and you must be confident enough to ask all the right questions upfront, such as payment terms, payment processes and the requirements for registering with a procurement department. Too often I see corporates stretching the scope of an arrangement beyond what is reasonable, resulting in entrepreneurs losing money on deals. A detailed contract will give you a reference point from which to charge additional fees for services or products that were not initially included in the contract.
Too many startups go belly up based on situations where they did not receive a purchase order number and delivered the work – very often at a huge cost – only to be told after the fact that no payments can be made without a PO number. (Maybe the PO number is the corporate’s secret way of telling you to PO when asking for money?)
When you close your next deal with a corporate, have the confidence to present a detailed contract outlining the deliverables agreed to and payment terms. Clarity and confidence are your friends and will serve you forever.