Capital Can't Fix a Results Issue

I think oftentimes when our companies struggle, the first instinct or thought is "I need more capital." While that can help things at times, I think entrepreneurs often fail to ask a very important question before taking out another loan, bringing on an investor, or pulling from savings. Is the problem creating the need for capital a timing problem or a production problem?

The Key Distinction

Typically, as a business owner, when you're facing a problem and considering pulling capital, it comes down to two types of problems.

Timing problem: A timing problem can be defined as having accounts receivable on the books that haven't been paid yet.

For example: You are waiting for a few invoices to be paid, but there are bills due tomorrow.

Production problem: A production problem can be defined as a lack of production or results that causes a shortage of cash.

For example: You are draining the company savings because your company sales are down and not generating enough revenue.

I think identifying what kind of problem you have is imperative to the long-term success of your company. If you aren't careful and you confuse the two, you could burn more capital and have the same problem months down the road.

How I Got to This Conclusion

Here's how I got to this conclusion in my own business. Recently I had to identify what kind of problem we have in the insurance agency I own. I found myself saying a little more capital would be helpful. I ended up asking myself these questions:

1. 01What would X amount in capital actually solve?
2. 02If we had this capital, would it push the needle forward to help us grow, or would it be buying us comfort?
3. 03Is the need for the capital coming from a lack of production?

By asking these 3 questions, I identified that money wasn't the real issue. Production was. Our sales were down because I had allowed things in my personal life to cause me to take my eye off the ball and start accepting mediocre activity and production from our sales team. A production problem needs a production fix, not a loan.

The Truth About Production Problems

After identifying we had a production problem in our agency, I came to the realization that capital wasn't going to fix our issue. It would only make us comfortable for another five to six months and delay us having to confront the real issue. This is where I think companies often slip and fall behind financially or unfortunately go under: they take out more capital to solve a production problem, when the production often isn't a result of a lack of capital. I think that it feels like money can often fix anything, and while it can buy convenience or a sense of security, it doesn't fix a broken sales process, a culture issue that is encouraging mediocrity, or an inconsistent lead gen strategy. What money can do is buy comfort, but comfort only gets you so far when the root issue is a broken strategy, process, or company problem.

Before You Take Out Capital

With all this being said, I am not saying taking out capital is a bad thing. If it can buy you a few weeks while you're waiting on invoices to be paid or for jobs to get completed, then taking out capital can be a good decision to make.

Capital also makes sense when you're funding something that already works. If you can show where each dollar goes and what it returns, that's growth capital. If you can't, it's probably comfort.

What I want to encourage you to do is avoid making capital the first thing you reach for when facing a production problem. While it may seem like the simplest or most reasonable thing to do, it can reduce the friction you may feel or make you completely oblivious to the real problem at hand. Capital cannot fix a results issue that is rooted in a cultural, strategic, or operational problem. It can only buy short-term comfort.

So before you take out a loan, bring on an investor, or pull from savings, answer the question first: is this a timing problem or a production problem?