You know your job is in trouble when you can’t log on to the Internet, and the Internet Service Provider tells you that the bill hasn’t been paid in months.
Such was my situation at a small government contracting company. But even before our Internet issues, there were other signs that the company wasn’t in the greatest health: slow payment from customers, turnover, and finally, some real stretching in terms of what our core business was.
This mini-case isn’t so much about a small project or a new software feature. Rather, it’s about the experience of being at a small company when things weren’t going so well. The decisions made at the top were pretty clear: keep the company afloat!
First, we started looking into doing projects for current customers that were slightly outside our core of software development. We actually became a small video production company, filming a fairly creative series of training videos; I got to wear a production assistant’s hat and even ended up doing some acting and voiceover work.
Perhaps the next thing that became apparent was the aforementioned slowdown in bill payment. And then, we abruptly decided to move the company’s offices from fairly high-priced space into a sort of sublease situation with another company friendly to ours.
Which was about the time that I decided it was time to leave. But even after I was gone and cashflow had slowed to the point where employees had to be laid off, essential staff were given the option to continue working as contractors—and some of them did.
And the impact? The company, such as it was, survived for about another year after my departure. Not too bad.
But there were plenty of lessons to come out of the experience, the first of which is key to all companies, especially startups: understand the sales cycle for your industry!
For us, government contracts were our bread and butter—and the government is slow. Slow to pay, slow to make decisions, slow to give feedback, slow to do everything. In fact, a request for feedback that had been submitted to a client agency before I was an employee still hadn’t been fulfilled by the time I had left.
But while the government is slow to pay, your bills still come due with alarming regularity, from rent to paychecks to those pesky folks at your ISP. You have to understand this, and understand that if there is a difference between when the actual check comes in the mail and your bills come due, you need to figure out how to bridge that gap. Thus, you probably need a fairly sizable cushion of cash just to get started in an industry with a long, slow sales cycle.
Without that cash cushion, it can become inevitable for a company to get caught in a “death spiral.†You don’t have the cash to make payroll, which means that you have to lay off (or otherwise lose) key employees who would have done the work that would eventually get you paid. No employees, no output, no payment, and you have to cut costs even more. At that point, you’re locked in the death spiral, where your costs will always exceed your revenue, and it’s only a matter of time before the padlock goes on the door.
Now, maybe this particular company had that, once upon a time. Perhaps they grew too fast, or didn’t land a key contract that they were counting on. I don’t know the specifics. All I know is, you can have all the “revenue†in the world: without cash, you’re sunk.
Some of the actions taken by this company—delaying payment, for example—probably fall on the dark side of the ethics scale. To which you might reply, “but they did keep the company afloat!â€
But they weren’t without cost.
First, there was the cost to the company’s reputation. If word got out that the company would resort to delaying payment as a business tactic, that could have a very negative impact on everything from creditworthiness to client relationships.
Second, but closely related, was the impact of the “stay alive†actions on morale. Nobody wants to be on a sinking ship, and by the time we resorted to the fairly desperate (I felt) measure of sharing office space, I had determined that things weren’t going to get any better.
If management had been honest about the company’s problems and outlined a plan for survival, would that have convinced me to stay? I honestly don’t know. But pretending that everything was fine certainly didn’t help.
Was there anything that could have been done differently? Well, we could have made more money and had more work. But that’s easier said than done.
Maybe the biggest lesson is this: running a successful business—and keeping it running—is hard.