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.