Financial Tips for Entrepreneurs

Financial Tips for Entrepreneurs

If you are young entre­pre­neur or start­up, I applaud you. Build­ing a com­pa­ny is truly one of the hard­est things I’ve ever tried to do. Three years ago, I decid­ed to quit my job to pur­sue my dreams of entre­pre­neur­ship and have learned a lot of lessons along the way. In this arti­cle, I’m going to share some of the finan­cial lessons I’ve learned in the process of start­ing my busi­ness in the hopes that you won’t repeat some of the com­mon finan­cial mis­takes many young entre­pre­neurs make.

#1: Time is Money

When I first start­ed build­ing my busi­ness, I spent a lot of time trav­el­ing to meet­ings, meet­ing with peo­ple, plan­ning for meet­ings, etc. Today, I wish I had all that time back. One of the most valu­able assets entre­pre­neurs have is their time, and every moment you spend doing stuff that is unre­lat­ed to your busi­ness is time and money wast­ed. When I was first start­ing out, I recall one of my advi­sors say­ing to me, “a lack of time is a lack of priorities.” It’s true. If you are wast­ing your time going to mean­ing­less meet­ings that are unre­lat­ed to your busi­ness, you can find your­self in a tough finan­cial sit­u­a­tion.

#2: Pre­pare for the Worst, Believe for the Best

Bad things hap­pen to good peo­ple, and it pays to be pre­pared. Fail to plan, plan to fail. If you are not finan­cial­ly pre­pared to take the leap into entre­pre­neur­ship, don’t quit your job until you are ready. There is no rea­son in the world to give up your income when you can work on your project on the side until you have trac­tion. For most sin­gle peo­ple, I rec­om­mend hav­ing at least 3 months of liv­ing expens­es in an peace of mind account. If you are going to be an entre­pre­neur, I’d rec­om­mend set­ting aside clos­er to six or nine months of cash in sav­ings that you can fall back on if you need it. Bad things hap­pen, cus­tomers don’t always pay on time and you need to make sure you have money set aside to keep you afloat dur­ing the tough times.

#3: Develop understanding of business cash flow

My accountant shared a piece of wis­dom with me recent­ly when he said, “there are three rea­sons a com­pa­ny fails: they run out of cash, they run out of cash and they run out of cash.” I am a natural opti­mist, he was a real­ist. But his words were very true. Cash flow is the #1 finan­cial met­ric you should learn how to con­trol when run­ning a com­pa­ny. If you don’t know where your money comes from or where it is going, you put your­self at risk. Cre­at­ing a bud­get and stick­ing to it is very impor­tant in a start­up.

#4: Set Clear Goals and Mile­stones

When you are an early stage entre­pre­neur, it is easy to waste time over-thinking your con­cept. In real­i­ty, the time spent day­dream­ing about your idea instead of test­ing your con­cept with poten­tial cus­tomers is wast­ed time. To reduce this risk, set mea­sur­able mile­stones and dead­lines early on and track your progress along the way. What is the dif­fer­ence between a goal and a mile­stone? Mile­stones are like sign posts along the way to your goal that show you how you are doing over time.

#5: Track your Spend­ing

When you are first start­ing out in busi­ness, there is a lot going on. For many entre­pre­neurs, keep­ing track of their spend­ing seems sec­ondary to cre­at­ing a busi­ness plan, talk­ing to cus­tomers, etc. But it is very impor­tant to cre­ate a sys­tem to track your spend­ing each month so you don’t have to scram­ble for infor­ma­tion when you need it. There is noth­ing more frus­trat­ing than dig­ging through paper­work look­ing for finan­cial infor­ma­tion at tax time or com­pil­ing finan­cial reports for bankers when you don’t have the infor­ma­tion read­i­ly avail­able. So rather than wast­ing time on the back-end, do your­self a favor and set your­self up right from day one. I’d high­ly rec­om­mend using an online book­keep­ing soft­ware like Quick­books and inputting your own infor­ma­tion for the first few months. If you find your­self hav­ing trou­ble find­ing the time, you can always hire a book­keep­er to help you out. Even­tu­al­ly, your infor­ma­tion may get more com­pli­cat­ed requir­ing the ser­vices of an accoun­tant around tax time. But there is no need to over­spend on pro­fes­sion­al ser­vices when you can very eas­i­ly track your expens­es on your own.

#6: Focus on Find­ing your First Cus­tomer

If you don’t have cus­tomers, you are not a busi­ness. So rather than spend­ing all of your time and money try­ing to deter­mine who your cus­tomers are, go to a hand­ful of poten­tial cus­tomers and ask them a very sim­ple ques­tion, “would you buy this?” If they say “no”, then ask, “why not?” The soon­er you do this the bet­ter off you will be as a com­pa­ny. This was one of my biggest mis­takes early on. I went to peo­ple I knew per­son­al­ly, who liked me and asked them “do you like this?” Being friend­ly and nice folks, they nat­u­ral­ly said, “of course we like this, and we like you too.” While this made me feel real­ly good about myself, it didn’t help me build a com­pa­ny. Find peo­ple other than your moth­er and best friend who may be poten­tial cus­tomers and ask them for real feed­back.

#7: Be Transparent to investors

There is noth­ing that gets peo­ple into more trou­ble in busi­ness than dis­hon­esty and a lack of com­mu­ni­ca­tion – this is espe­cial­ly true for early-stage busi­ness­es that are look­ing to raise money or get a loan. If you act shady and secre­tive, peo­ple won’t trust you. Sim­i­lar­ly, if you are unable or unwill­ing to reveal the num­bers that drive your busi­ness’ suc­cess, you can lose the trust of sources of cap­i­tal. Your investors maybe friends and fam­i­ly, Make it a reg­u­lar prac­tice to keep them “in the know” on your com­pa­ny’s finan­cial sit­u­a­tion. While it isn’t always a pleas­ant con­ver­sa­tion it helps estab­lish cred­i­bil­i­ty and gives them oppor­tu­ni­ties to help you nav­i­gate the tough times. If you are an entre­pre­neur and don’t have investors, find some advi­sors and hold quar­ter­ly meet­ings with them to talk through the num­bers. It’s both a good prac­tice and a way to get some addi­tion­al sup­port and ideas for your com­pa­ny.

#8: Pay Your­self

After 3 years of counting the pennies, I’ve final­ly learned an impor­tant les­son – you can’t eat equi­ty for din­ner. While many early stage com­pa­nies don’t have enough rev­enue or cash to pay them­selves big salaries, you’ve got to find some way to pay your­self along the way. If you don’t, you are doing your­self and the busi­ness a dis­ser­vice. There is noth­ing riski­er from an investor’s per­spec­tive than giv­ing money to some­one who “needs it.” Peo­ple who are in des­per­ate finan­cial sit­u­a­tions do irra­tional things. To avoid this risk, don’t be afraid to pay your­self a salary. Investors under­stand that you can’t get by on a tin of soup

#9:  Keep your Fixed Costs Low

In the early stages of start­ing a busi­ness, it is smart to keep your fixed expens­es as low as pos­si­ble. So rent­ing a huge space on the parade in Leamington Spa on day one may not be the best strat­e­gy. As your com­pa­ny’s rev­enues grow over time, you can start tak­ing on more over­head. But be patient. If you need office space, see if there are any low-priced, month-to-month options avail­able to you. If there is an incu­ba­tor pro­gram in your city, check it out. Also, con­sid­er turn­ing your home or apart­ment into an office space. You’ll be able to write it off on taxes. So before you start sign­ing high-priced two-year con­tracts with ven­dors, make sure you have the rev­enues or cash need­ed to cover your costs.