Why Did Zirtual Shut Down?


Zirtual’s shut down might have been abrupt, but their problems started almost a year ago. According to the CEO, Maren Donovan, the numbers were “f***ked”

This is a technical term for incomplete and inaccurate.

Zirtual had two root problems that caused the crisis; they did not hire a professional CFO to help them control expenses and manage cash. Their expense projections weren’t accurate and their gross margins were too dang small.

As for the books, they were “just kinda doing it ourselves”.

According to Intuit research, 87% of business owners are doing their own books and 45% claim to be financially illiterate. You can’t make this stuff up. Of course this is a disaster waiting to happen.

The fix to this is bite the bullet and hire someone who is an expert at keeping your financial dashboard accurate, current and complete every, single week. This is true for going concerns as it is for start ups.

Donovan said, “we were penny wise and pound foolish” when it came to saving money on a CFO.

You, as CEO, focus on building products the market needs, servicing customers who pay your bills and building a team that will enable the business to scale profitably. That’s the role of the CEO.

The second problem was the margins were too thin. Donovan calls it “lean”, though I think the margins were so thin, the business wasn’t workable long term.

Even if Zirtual had received that last tranche of investor cash, they’d still end up with a cash crunch down the road.

Unlike it’s competitors, Zirtual did not hire their staff as subcontractors but hired them as full time employees with benefits; all 400 of them. If they had the deal flow (revenues) from aggressive marketing efforts, they figured the model would work.

The margins might be thin, but they’d make it up in volume. One can do that if you’re as efficient as Walmart or as good at raising capital as Jeff Bezos.

Regardless, the business at some point has to generate enough cash flow to be financially self-sustaining. Zirtual was close, but not close enough.

What Donovan realized when she really got into the numbers was that their cost projections did not include the cost of two payroll weeks for the two months where they had three payrolls. Expense projections were under reported by $1,000,000. That’s a big “oops”.

They were $1,000,000 short in cash. The investors got cold feet and in an instant Zirtual was no more. They simply ran out of cash and couldn’t make payroll.

They were operating two weeks away from bankruptcy.

Always remember, when you hire a full time employee the real cost to the business is twice whatever their salary is. If the employee is not fully productive most of the time, the business can’t afford to pay them.

The problem was not the monthly burn rate, but the thin gross margins that didn’t translate into cash fast enough, hence the need for more investor capital.

Startups.co thinks there’s something here and struck an 11th hour deal to keep things going under their umbrella.

Lessons learned? Gross margins of 30% or greater will help you stay out of trouble. Don’t outsource your CFO. Get the absolute best you can afford. Make them part of your team from the beginning. They’ll keep you on track and help manage risk.

It sounds like they had some great people on staff at Zirtual. Kudos to them for trying to disrupt an entire industry. I hope Startups.co makes a go of it. I could use a kick butt virtual assistant right about now….

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