When starting a business, an entrepreneur will find that he or she must wear many corporate hats. A founder will be engaged in product development or service development, financial operations, human resource management, tax planning, sales, marketing, etc. — and can find his or her self running in many different directions. For all business matters, the buck stops with you, the founder.
Key to managing for growth and success, however, is keeping your eye on the financials. It’s essential that a founder understand the importance of accurate financials — both for company stability and for a founder’s ability to plan, as well as convince and assure investors of the validity of the plan.
If a founder knows the potential missteps, he or she can take action to avoid them. Here are some common missteps and advice borrowed from David Ehrenberg at Early Growth Financial Services:
1. Miscalculating (or worse, not calculating) the cash burn.
The burn rate is the amount of capital spent every month to keep your business running. If you don’t have a good understanding of your burn rate, you are hindering your ability to achieve your milestones before your money runs out. Keeping track of all of your expenses will minimize these miscalculations.
Ehrenberg recommends a bottom-up forecasting (versus top-down), using real-work variables. Top-down forecasting can lead to overly optimistic projections for revenue.
Reforecasting is also important. You must account for both fixed costs and variable costs while continually adjusting projections that accurately reflect the real state of the business.
2. Not completely understanding your marketplace.
If you don’t understand the marketplace, you can find your product and/or service priced incorrectly.
Consider your market position and the value of your company’s offering. Who is your customer? Who is your competition? What trends may affect your market and how?
3. Hiring and expanding too quickly.
Human resources are a company’s greatest expense. Having too many employees is a huge drain on company funds.
There’s also a psychological cost: What will happen to the company’s reputation if you have to lay-off employees? How will investors view your company if you’re downsizing?
Instead, hire slowly.
4. Making bad hires.
Bad hires have a huge impact on operations, and thus, revenue growth. Don’t hire for the sake of hiring experience.
Whenever possible, outsource non-core competencies. For example, outsource financial support and free up time to focus on other aspects of the business. A good financial professional can manage the obligations and/or details allowing you to stay on track.
5. Doing your own finances when you have no training.
Do you know all the generally accepted accounting principles, changes in tax laws or charting of accounts? It will cost you more in the long run to do your own finances rather than hiring professionals.
You can outsource both the bookkeeping and CFO position while your company is small. This will get the financial work completed accurately, effectively and efficiently. As your company grows, it will become reasonable to bring these responsibilities in-house, at a point where your company can afford it.
Catherine V. Mott is the CEO and founder of BlueTree Capital Group, BlueTree Venture Fund and BlueTree Allied Angels.
