Tweet

Financial Fitness for Entrepreneurs

Written by: Brad Feld

Article Overview: While creating a growth business can be exhilarating, many entrepreneurs – especially those starting a company for the first time – don’t pay enough attention to some core issues surrounding the financial management of their businesses.

Financial Fitness for Entrepreneurs

I thought I'd give you a break from the DNC coverage in the blogosphere(and everywhere else).

I wrote the following article on "financial fitness for entrepreneurs" last year for the Kauffman Foundation's Entreworld web site so it's reasonably fresh; I got a lot of positive feedback and it ended up in USA Today. It's aimed at any entrepreneur - not just those running venture funded companies. While it's aimed at an early stage entrepreneur, I think it's useful whether you have one employee (you, the founder) or thousands of employees in your business. It was "professionally edited", so it lost some of my special voice (you'll notice the lack of cuss words.) Enjoy.

While creating a growth business can be exhilarating, many entrepreneurs – especially those starting a company for the first time – don’t pay enough attention to some core issues surrounding the financial management of their businesses.

Often, founders don’t have formal training in finance – they’re “techies” launching the next Apple Computer or Netscape, professionals putting together advertising, management consulting, or human resources agencies, or super-salesmen types who’ve figured out how to sell a pizza or deliver a package faster, better and cheaper. Always, they’re intimately involved with their core product or service. Often, they are too busy to burrow into the details of some of the company’s functions, of which finance is the most critical.

These entrepreneurs are savvy enough to know they must work with financial professionals, such as their CFO and outside auditors or CPAs. However, no matter what their background or inclination about finance, founders need to have a working understanding of the basics. An elementary level of financial literacy means they’ll work more intelligently with their financial advisors and become the first line of defense for spotting potential problems in the young company.

What follows are some fundamental financial tenets that all early-stage entrepreneurs should be aware of, understand, and heed.

Cash is king: No matter what, don’t run out of money. Nothing else in this article matters if you run out of money. This means know your burn rate (the net cash that is flowing out of your business each month) and be aware that your low cash point for any given month may not be at the end of the month. In other words, don’t get caught planning based on full month figures only to find that you do not have enough money to pay your most important vendor on the 15th because your customers don’t pay you until the 30th.

Put in real financial systems from day one: Lots of entrepreneurs figure that they’ll “get around to putting in real financial systems someday soon.” Of course, that rarely happens, especially if no one on the founding team has a strong financial background. The cliché, “It’s better to build on a strong foundation,” applies. Put the foundation in place early so that as your business grows, you are on solid financial footing.

Measure everything: If you have real financial systems in place, you can measure everything. Be obsessive about it. Some things that you’ll measure will be similar to what most other businesses measure, such as your P&L, balance sheet, and cash flow statements. Other things will be unique to your business – oriented around your specific customers or products. As your business grows, make sure you evolve and expand what you measure to best reflect the current state of your business. Look especially for metrics that will help tell you where your business is going, not just where it has come from. Financial systems can and should capture more than just historical financial results.

Build an annual operating plan: Be disciplined about creating an annual operating plan and budget every year. You should have it finished before January 1. This is your easiest benchmark to measure against - your own expectations. If you don’t set them, you won’t know how you did.

Use your vendors to fund your business: Vendors love to get paid on time (or early). However, as a young business, your vendors will appreciate consistency of payment over timeliness. While most vendors will want to be paid within 30 days (or less), it’s typical to stretch payables 45 to 60 days. The key is to pay consistently – if you have a vendor from whom you continually use services or buy products, don’t store up your bills and pay in one lump sum sporadically. Instead, send regular payments. Also, don’t dodge calls from vendors about paying late. Tell them when you are going to pay them, and then make sure you follow through.

Use your customers to fund your business: Customers – especially ones that value your products and services – will often be willing to pay on very short terms. Don’t be bashful about asking them to prepay, especially if you are a service business.

Be careful of personal guarantees: Banks love personal guarantees. Entrepreneurs hate them. You should avoid them if you can – only sign one as a last resort. You are already investing a huge amount of your personal assets and energy in your business. If you can’t get financing based on the strength of your business, you should question whether it’s the right kind of financing. In the upside scenario, when your business succeeds, the personal guarantee doesn’t matter. It’s the downside case you should be worried about, because you could lose major personal assets like your house.

If it sounds too good to be true, it probably is: While this is generally true in life, it’s especially true concerning financial issues surrounding an early stage company. Your books should always balance, financings will always have a cost, and investors are always going to have strings attached to their money. Ask questions, be wary, and know what you are getting into.

Finance your business appropriately for what you are trying to create: One of the most common mistakes an early stage entrepreneur makes is trying to raise the wrong kind of money for the business. It makes no sense for a service business that could potentially be a $5 million company within three years to try to raise $10 million of venture capital. Correspondingly, it doesn’t make sense for a capital-intensive company that needs to build a plant to raise $250,000 of angel money.

Choose professionals carefully: It may be tempting to use your wife’s brother’s friend’s neighbor as your lawyer, because he will give you a great rate and you see him at the neighborhood barbecue, but you get what you pay for. The same is true for accountants and other services that your business will use. Find professionals who know what they are doing and have experience with young companies.

Don’t take anything for granted: Double-check everything. If you have the right systems (did I mention that you should have good systems?), this is easy. If you don’t, reread the second bullet point and put in the right systems.

Pay your taxes on time: Unlike customers and vendors, our local, state, and federal tax authorities don’t appreciate being used as financing sources for your business. In addition to potentially incurring onerous penalties, missing or delaying tax payments is often a serious crime.

That’s the list. Read it over, familiarize yourself with it, and begin developing a lay entrepreneur’s understanding of finance. You’ll then be able to work deftly with your pros to put the company of your dreams on the sound financial footing necessary for success.

Read this article in Brad's blog.

Related Articles
  The Focus on Fitness Franchises
  TEN FRANCHISES POISED FOR GROWTH
  Snap Fitness Ranked No. 16 in the Inc.500
  Financial Fitness: It's Really Not About the Money!
  7 Top Benefits Of Owning A Fitness Franchise

Article Tags: advertising management, apple computer, core issues, core product, cpas, cuss words, dnc coverage, entreworld, financial advisors, financial fitness, financial literacy, financial professionals, growth business, inclination, kauffman foundation, netscape, positive feedback, salesmen, theyre, usa today



Related Forum Posts
Future Financial Corporation - I've never heard of Future Financial Corporation is this a new company?
CEOs and Email - Slaves? - I wonder if the emails they are responding to are filtered thru their assistants first 'cos they seem to spend a lot of their off hours responding to them. True they are successful but I'm not sure I'd be willing to pay that price. I'd be interested to know what's the in the typical day planner of Entrepreneurs on the Forum. Entrepreneurs are a different breed than Paid Employees- so it would be interesting to view the contrast.
Fundraising for 3rd world Entrepreneurs - How great to learn that Evan is doing something for Entrepreneurs in Africa! It just makes me even more thankful to be part of this forum! After helping create a new charity for animals in my local community last year, I created a vision for a charity empowering Women Entrepreneurs. It won't happen for a while yet, but I know it is something I will do within the next few years. As we allow ourselves to think bigger, the opportunity to impact people becomes much bigger as well. Does anyone else have a desire to really make a difference in the world through this means?
Any experience with McManus UK Ltd.? - Did anybody already deal with any of the McManus UK Ltd offshore entities? I do have a program, but not enough cash. I have been advised that they can fund investors with access to Private Placement Programs but they don’t want to joint venture with me. They want a fee for the service. This is why I want to find out if anybody has had first hand experience with this group? Patrick Ohara, Financial Consultant
Re: Greetings from Camping Embroidery - You are welcome to the club. You are networking with the best Entrepreneurs on the whole wide web


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Making the Most of Your Trade Show Experience

Halloween Howl Seven by Author Paige Agnew

Convening a focus group for a niche product

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.