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Financial

for Entrepreneurs

While creating a growth business can be exhilarating,

many entrepreneurs—especially those starting a

company for the ﬁrst time—donʼt pay enough

attention to some core issues surrounding the

ﬁnancial management of their businesses. continued >

by Brad Feld

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Fitness

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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.

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CASH IS KING

No matter what, donʼt 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, donʼt get caught planning based on full

month ﬁgures only to ﬁnd that you do not have enough money to pay your most im-

portant vendor on the 15th because your customers donʼt pay you until the 30th.

PUT IN REAL FINANCIAL SYSTEMS FROM DAY ONE

Lots of entrepreneurs ﬁgure that theyʼll “get around to putting in real ﬁnancial sys-

tems someday soon.” Of course, that rarely happens, especially if no one on the

founding team has a strong ﬁnancial background. The cliché, “Itʼs 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 youʼll measure will be similar to what most other business-

es 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

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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 donʼt set them, you wonʼt 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), itʼs 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, donʼt store up your bills and pay in one lump sum sporadically. Instead,

send regular payments. Also, donʼt 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 will-

ing to pay on very short terms. Donʼt be bashful about asking them to prepay, espe-

cially if you are a service business.

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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 canʼt get ﬁnancing based

on the strength of your business, you should question whether itʼs the right kind of

ﬁnancing. In the upside scenario, when your business succeeds, the personal guaran-

tee doesnʼt matter. Itʼs 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, itʼs especially true concerning ﬁnancial issues sur-

rounding 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 busi-

ness that could potentially be a $5 million company within three years to try to raise

$10 million of venture capital. Correspondingly, it doesnʼt make sense for a capital-in-

tensive company that needs to build a plant to raise $250,000 of angel money.

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Feld Brad - Financial Fitness For Entrepreneurs.pdf

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