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Financial Fitness for Entrepreneurs – Accounting Basics for Business Owners

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.

by Bradley Feld
Mobius Venture Capital

http://www.entreworld.org/Content/EntreByline.cfm?ColumnID=557

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.

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Financial Literacy—Yikes!

by Mary Ellen Sheets
TWO MEN AND A TRUCK/International, Inc.

http://www.entreworld.org/Content/EntreByline.cfm?ColumnID=558

Our company, TWO MEN AND A TRUCK/International, Inc., began more than 20 years ago when my two teenaged sons moved people with an old pickup truck for spending money. We organized and polished this little business and, in 1988, began offering franchises. We are now in 25 states with 125 locations and making plans to go international. Last year our company grossed $122 million, system wide, with $8 million accruing to us. We are a privately held, family-owned company. My daughter, Melanie Bergeron, is the president and COO. My two sons, Brig Sorber and Jon Sorber, are actively involved in running the franchising end of the business.

My background was in data processing. I knew how to design systems, reports and forms, but nothing about handling money. I’ve been invited to share my thoughts with you on financial literacy for the entrepreneur. Yikes! Every entrepreneur has a special interest, which combined with persistence, hard work and luck, may produce a successful business. Unfortunately for me, I had no background in finance. No Accounting 101. I called my accounts payable and receivable the “in and outs.” For more than a decade, I kept them in a shoebox under my desk.

Muddling Through

My sons and daughter didn’t have a financial background either, nor did any member of my staff. Melanie is trained in marketing. Brig has a degree in community planning, and Jon has a business degree. Oh, a daughter-in-law is an accountant by training, but she is a stay-at-home mom.

When our company became a franchiser, a yearly audit was required. So the auditors would come in. It was hard for them to dig through the papers, and they’d be here for days. We didn’t hire an accountant until four years ago (more about that later.) But somehow we muddled through.

Sure, there were problems. In 1994, I decided to run for the Michigan State Senate. I asked my son, Jon, and my daughter to run the business in my absence – for no pay. Happily, politics wasn’t for me, and I soon came back. In the mid 1990s, a spate of lawsuits brought by five different franchisees nearly put us out of business. A lawyer agreed to work for us under the only terms we could manage: that we’d pay what we could when we could. Eventually, we prevailed, and the lawyer did get paid.

Muddling through characterized our day-to-day financial operations as well. I used a simple Quicken software package to pay the bills, fishing through the “in and outs” for the paper invoices. When we wanted to buy something, such as space for our annual meeting for franchisees, if we had the money, we’d buy it. If we didn’t have the money, we wouldn’t.

So what’s the moral of our story when it comes to financial literacy for entrepreneurs? Well, I do have a few thoughts. A lot of being on top of finances involves common sense. Some of it can be learned. Finally, when you feel there’s nothing you can do but throw up your hands, there are still things you can do.

Common Sense

Let me explain. When it comes to being in business, you must first pay your people (and their taxes), even if you have to sneak the money out of your grandmother’s knitting basket! That’s just common sense. You know that from experience.

You also know you must pay your bills. If you run short, contact the person you owe, explain the situation, and send a partial payment. If your vendor couldn’t pay you, after all, you’d want the same. You’d want to talk and work it out. You’re doing business with people—you have to talk to them.

When people owe you money, be persistent about collecting. I used to hate sitting at my desk, knowing I’d have to call someone who hadn’t paid. But I had to, and I did. Let the customer know you’re serious about collecting the money owed you. Charge interest if it’s legal in your area. Never let accounts receivable end up in a dusty pile on some shelf, because you’re uncomfortable about pursuing the debt. It’s money right out of your pocket.

Finally, if your business is cyclical, put aside money during your busy season. In the moving business, we are busiest during the summer. That’s when we have all of this money and think we can spend it. But then come January, February, and March. Once I was driving to the bank so broke that I had to put in money with a credit card. Never again!

Next Steps

I’m still not a financial expert. Unlike me, you could become reasonably proficient by taking some business classes. Many community colleges offer them. You could learn how to make wise financial decisions and let your money work for you. I should have known how to prepare a business plan and have a budget. But I never took those classes. I was “too busy.” That was a mistake.

We finally did hire an in-house accountant four years ago, and we now have a staff of four in finance. The impetus was that my auditors were hounding me, because our company had gotten too big, and the books were messier than ever. I don’t know why we waited so long. Actually, I do know. We thought we couldn’t afford it. That, too, was a mistake. The new accountant found a large error in our workman’s comp rate the first week he worked for us – and the savings paid his annual salary!

Final Thoughts

Sometimes you don’t have the money to do anything. Those are the times you should be working to improve your business. Clean out the files! Clean your office! Make your headquarters inviting to customers! Plant flowers around the front door! Call on prospects – I would pack jellybeans in coffee mugs inscribed with our logo and pass them out to apartment-building managers. It was our version of cold calling.

Get moving! DO something! If you do, the money will come, and YIKES! You’ll then have to put all your common sense to work to make the best of it. You might even have to take a course – or hire an accountant. Good luck in getting smart about your company’s finances!

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Accounting Basics for Business Owners

by Steven Cohen
Exact Accounting Services Inc.

http://www.entreworld.org/Content/EntreByline.cfm?ColumnID=560

Breathes there a business owner who relishes the prospect of reviewing the books? Likely not. Owners are too busy tending to what got them into business in the first place. They have to be in order to attract and retain those all-important clients and customers.

Caterers need to be preparing tasty canapés. Landscapers must be designing plot plans and artful flowerbeds. Doctors and dentists must be curing sore throats and fixing recessed gums.

So who’s minding the financial store? The best guess is no one. And that’s where we come in.

A Little Help for Our Friend

A few years back, a friend with a health care consulting business, asked my wife, Tami, who is an accountant, to take a look at the books. They were a mess. She straightened them out.

At the time, Tami and I were running a technology services business that we had co-founded in 1993 and were about to close. All of those unattended ledgers appeared to be a business opportunity. So we launched Exact Accounting Services Inc. in 2001 to do for other small businesses what Tami had done for our friend.

We’ve since worked with 200 such businesses, mostly service companies and professional associations. What we’ve come to believe as a result is that all owners – whether or not they have training in accounting or are even interested in it – must acquire at least a layman’s understanding of the field. They must be able to attend to accounting without becoming accountants.

Why Accounting Literacy Matters

A literate owner is better able to deal with the professionals whose job it is to assure the integrity of the books, and thus save time and money. A harried owner with shoeboxes full of receipts and invoices at the annual review is a CPA’s nightmare. Better to have the books in order so that costly CPAs can tend expeditiously to preparing the tax return.

A financially literate owner, moreover, is more likely to be in control of the business. Understanding accounting and the software tools that have computerized ledgers – QuickBooks is our pick for companies with under $10 million in revenue and 50 or fewer employees – means that owners can spot problems early: the customer who hasn’t paid; the vendor that has billed too much; the black ink that is turning red. Caught early, problems are more likely to be resolved.

Fraud is another issue that can be nipped in the bud if owners are knowledgeable about the books. A half dozen of our clients have had such issues. Fraud usually starts small, with $20, $200, or $2,000 missing from the coffers. Early detection can save a company from insolvency. Remember that back payroll taxes and penalties are still the responsibility of owners whose companies have gone under because of fraud.

Getting Savvy About Accounting

Becoming literate should start with the owner retaining an accounting professional who isn’t necessarily a CPA but who has proficiency in both bookkeeping and the specific software program the company uses. This duality is key. It won’t work for the accountant to be unfamiliar with the software, or for a tech savvy non-accountant to install the program.

Programs must work for your business, rather than for the other guy’s. Don’t make the mistake of choosing a program because others are using it. If you aren’t an accountant, have your accounting professional install it. The investment of about three hours or more depending on the complexity of the setup will usually run about $500 and up and will guard against problems in the future. If you’ve already set it up yourself and you aren’t an accountant, have a professional check the work.

Next, invest in training and technical support. You can take a course, but courses are lengthy and cover unnecessary material. Better to have your professional train you on site. You’ll learn only what you need to know and in a shorter time.

Further steps involve savvy use of the software. You shouldn’t give the administrative password to any employee. That’s like handing over the keys to the vault, because it allows access to sensitive areas of the program. You alone should have that control. Others should have limited access.

You need to always keep the so-called “audit trail” feature on, because that allows tracking for deletions and changes to transactions, which is the chief way to spot fraudulent activity. Back up your accounting data, and store the backup disks off-site or use an online backup service.

Beyond Accounting Software

Literacy involves treating the software as a tool and acting as well to install safeguards that are common sense. From the material generated by the program, owners should learn what various pieces of data mean, such as the profit and loss statement and the balance sheet. That way, they’ll have an understanding of the financial health (or lack thereof) of the business.

Other safeguards include steps such as making copies of all checks that come in. It’s also a good idea to have different people make deposits and write checks. For larger disbursements, some companies require the signatures of two officials.

You can’t do it all as a small business owner, but you must do some of it. The most critical area in which you must attain acumen is the financial. Savvy overseeing of your books will enable you to build a company that thrives. And it’s literacy that enables you to do that.

©2004 Ewing Marion Kauffman Foundation

4801 Rockhill Road Kansas City, MO 64110

All rights reserved.

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