Financial Fitness for Entrepreneurs

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.

©Bradley Feld
Managing Director, Mobius Venture Capital