Lack of Working Capital Can Bankrupt Your Startup | DataDrivenInvestor
… even if you are making a profit.
Working Capital is the lifeblood for most businesses. It can make the difference between surviving and growing or going bankrupt. Working capital is all about planning, negotiating and timing. Oftentimes, owners learn this the hard way.
After leaving the investment banking world, my then husband and I started our own business. According to family folklore, his father’s plastic manufacturing business had patented the original Hula Hoop which was featured on The Art Linkletter Show and immediately became a worldwide fad, its sales estimated to be over 100 million hoops in two years. After those two years, his family went back to their regular plastic extrusion business for OEM customers like automotive companies and the like. Whamo registered the name and continued selling them, albeit in much lower numbers.
At the 50th anniversary of the launch of the original, a cousin asked us to make hoops for their chain of American Greetings stores which numbered about 50 or so. We updated the colors to fluorescent shades and they looked fantastic. We named the hoop the Maui Hoop and called our company Maui Toys. We invented three more products, went to our first trade show, the International Toy Fair in New York City, and our toy company was off and running.
Maui Toys was soon selling to large retailers such as Toys “R” Us, Walmart, Target, Kmart, Children’s Palace, and a slew of other smaller chains and independent toy stores. It was great fun, but we were facing a looming working capital problem. We were self funded and it was one thing to make a few thousand hoops for one smallish store chain, and it was another to make hundreds of thousands of hoops for huge chains such as Walmart.
Before I get to our survival strategy, let me explain what working capital is for those who don’t know. It is the money a business needs to cover the gap between paying bills for its manufacturing or purchases of its products and collecting money from the sales of those products.
This can pose a problem. Why? Let’s use the example of making hoops. You order your hoops from a plastic manufacturer, in…