This month the virtual assistant company Zirtual ceased operations overnight. Zirtual was not a small organization, it had raised $5 million and had 400 employees. The companies employees didn't know anything until they tried to log on their computers Monday morning. Clients only had a general communication that operations had 'paused'. There was no warning and it wasn't until the next day that the CEO posted a short communication out on social media indicating that the problem was burn rate or how much money it spends above what it makes. The CEO indicated that the company grew faster than they could handle due to converting from using contractors to having full time employees.
But blaming growth is not where the the problem was. The problem was that the company did not have the right financial tools, reporting or a financial plan to move forward and manage the growth. Spending more than you make as a business should show in your financial reports or cash flow reports. Zirtual should have seen monthly reports showing red at the end of the reports. Once there is a monthly trend of hemorrhaging cash, management should have jumped to action. But if your a small business or startup how do you manage this situation? What could Zirtual have done differently?
First, there should have been a competent financial leader whether it is the CEO themselves or whoever is the designated financial executive. Secondly, for a startup there should have been financial projections to show where the company would be financially within the next six to twelve months with burn rate and how far current cash in bank could take the company (what month do you run out of cash). This should not have been a surprise, if the company was thinking of changing their business model a financial projection with the monetary impacts of the changes should have been put together and presented to the executive team. If this had happened the company could have developed a plan that would have allowed them to move forward and gradually change their business model. A quick analysis of customer requests and an average time to complete requests could have provided the company with an estimated number of employees needed and how much the payroll and tax obligation would be in the new business model. Instead Zirtual was either caught off guard, or the leadership team knew what was happening and didn't know what to do next. This highlights why both small companies and startups need to have a full understanding of their finances. While it's great to have the slick marketing, the social media, the great technology, without the right financial tools and knowledge all of that is worthless. What is left now are former employees looking to continue working for clients but as independent contractors. Startup.co has pledged to buy the assets and restart the company, but in what form no one knows yet.
Having the right financial tools ensures that you understand the impact of major decisions or changes to your business models so that leaders can correct the course and continue to be the captains of their ships as opposed to leaving a sinking ship quietly while your crew sleeps in the middle of the night.
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