A case study in cash management
E-Mersion Media (Aust) piqued the interest of investors and secured considerable funding, including $200,000 from the Australian Government’s COVID-19 JobKeeper grant. However, lavish spending, poor revenue generation and several millions of dollars in accumulated debt were major factors that contributed to its demise.
For entrepreneurs and start-up founders, managing business cash is crucial to ensure the company has enough liquidity to cover operational expenses and unexpected costs. Mismanagement of cash, however, such as overspending on non-essential expenses or underestimating future financial needs, can lead to severe financial difficulties, hindering growth and risking possible failure.
Based on an analysis of E-Mersion Media’s experience, there are five essential learnings business owners can take away to help them make robust financial and operational decisions.
Watch your spending
E-Mersion Media’s financial woes were exacerbated by high expenditure on luxury travel and accommodations. When revenues are tight, extravagant spending can sink a business. It is always good practice to review your expenses – daily, weekly and monthly – and ensure these expenses are justified by your income.
Once cash flow issues spiral, this can lead to excessive debt problems, which is too often the root cause of a business’s demise. According to reports, E-Mersion Media owes more than $11 million to creditors, as well as $1.1 million in tax debts.
Validate your business model
E-Mersion Media committed early to a business model without extensive market validation. Their vision was to digitise print magazines—a noble idea—but the demand wasn’t sufficiently tested.
Conducting pilots and seeking market feedback before full-scale implementation is essential to confirm whether or not your business idea resonates with the target market. By testing ideas early through customer feedback and market research, businesses can avoid costly investments in products that might not succeed. If you discover that your business needs to pivot, it’s cheaper to pivot early rather than overhaul the entire business later.
Pay your people
Staff were left with $255,000 in unpaid entitlements, including $149,000 in unpaid superannuation. This not only impacts morale but can attract legal issues. Whilst it’s a tough climate for business owners, prioritising fair and timely compensation to maintain trust within your team is a non-negotiable, and further, is part of your responsibilities as an employer.
The Australian Tax Office (ATO) takes a strong stance on superannuation being paid to employees and to not be used for other purposes, such as to help keep the business afloat in cash-stricken times.
You can learn more about paying employee superannuation here.
If your business is struggling to pay staff wages and entitlements as these fall due, this is a sure sign to reach out to a professional financial expert, such as an accountant or business debt specialist.
Strategic financial planning
Despite securing funding, E-Mersion Media didn’t manage their cash flow effectively, leading to operational liabilities. Introducing stringent budgeting practices, as well as considering periodic financial audits are crucial to help entrepreneurs and founders keep track of where money is going. Doing so will also identify potential areas for business cost-cutting and cost-saving.
Further, regular financial forecasting and financial scenario planning helps to provide business owners with a clear view of the company’s current financial health and potential future outcomes.
Sustainable growth over rapid expansion
Avoid the allure of swift expansion without solid financial backing. E-Mersion Media expanded ambitiously but without a strong revenue foundation. It is always wise to focus on steady, sustainable growth, ensuring you have the revenue streams to support your ambitions.
Actionable insights for entrepreneurs and start-up founders
Financial management
- • Lesson: Implement financial controls and avoid excessive spending, especially when revenue is limited.
- • Actionable step: Regularly review your budget and align expenses with cash flow.
- • Expert guidance needed: Address financial struggles by seeking advice to establish strong financial controls.
Sustainable business models
- • Lesson: Validate your business model’s viability through market research and testing.
- • Actionable step: Conduct pilot projects and gather market feedback before scaling operations extensively.
- • Expert guidance needed: Consult experts to ensure your business model is viable and market-ready.
Employee welfare
- • Lesson: Maintain a transparent and fair work environment, ensuring timely employee compensation.
- • Actionable step: Prioritise paying staff wages and entitlements, including superannuation, to support team morale and retention.
- • Expert guidance needed: Work with specialists to establish fair compensation practices and sustain a positive workplace culture.
The story of E-Mersion Media provides a stark reminder that financial discipline, strategic planning and market validation are crucial for small and medium business owners.
By learning from their challenges, Australian entrepreneurs and start-up founders can steer a more stable and prosperous course.
How AVA Advisory can help
As a leading corporate restructuring and debt management firm, our team at AVA Advisory can offer valuable insights to start-up founders and SMB owners looking to strengthen their financial practices, as well as address the complex challenges in today’s competitive environment.
As the incoming waves of post-pandemic insolvencies rise, FY2024–25 is a time to plan, prepare and prevail. Due to ongoing economic uncertainties, inflation, trading challenges and potential shifts in market conditions, now is a time to be clear on cash and cash management.
Through a collaborative approach, business owners can survive the economic storm and traverse FY2024–25 with greater resilience and financial stability.
Gain the financial insights and strategies your business needs to succeed. Get in touch with AVA Advisory today by calling 1300 181 220 or book a confidential, no-obligation consultation through our online platform.
