Small Business Boomers

Thinking about finance

by jim on November 13th, 2006

Finance – the 3 most important points

You may think that your business plan is fun and sexy, but wither it flies or crashes depends on the numbers and how you work with them.  Below are three major financial concepts, and some minor ones, for entrepreneurs.

First, most small businesses fail because they do not have enough money behind them to weather difficult times.  The most difficult time is the startup process, usually the first year.  Many enterprises fail because the entrepreneur puts all his or her money into getting their baby off the ground.  They do not have a reserve to live until they develop a positive cash flow from operations. 

A friend of my mine and fellow entrepreneur, Rich Lochrie, had a pretty good formula.  Take your sales forecast, cut it in half.  Take your cash requirements and double them.  At that point if everything still looks good to you, go ahead.  Of course Rich presumes that everyone makes a forecast of cash flow, expenses vs. revenue.

Second, keep good records of your financial transactions.  If you don’t have a written record (receipts – physical or electronic) of a transaction it didn’t happen.  The IRS and other government agencies will ask you for them.  The second reason that businesses fail is that they don’t pay required taxes and fees.  This can be a big problem because legal and accountants fees, fines, interest payments and jail time are common components of government reactions to these failures to manage by small business owners.

Third, all the money associated with a small business is your money.  Just don’t mix business and personal finances.  If you business needs money you will provide it one way or another.  If you borrow, it’s your money because you have often personally secured the loan.  If you bring in another investor, you’ve sold off a piece of your property to generate investment capital.  If your children want to eat they are eating money you could be using for your business.  That sounds funny, but it works the other way too.  The business takes food out of your family’s mouths.

Number three is very good to keep in your head at all times.  It makes you frugal.  You don’t really need to rent an office.  You can work out of your garage.  Are you generating enough revenue to put on a secretary?  How much money does a sales person have to generate in order to be worth the effort? 

The rest of finance is easy in the abstract, difficult in reality.  In all its varied forms it gets easier with time.

Some basic rules you probably already know for you own experience.

• Simple is good – If the financial arrangements appear to be over complicated chances are there is a problem.
• If it’s too good to be true, it is. – No legitimate financial institution is going to give you a better deal than anyone else they deal with.
• Take things in small bites. – Nothing good goes as quickly or as well as you plan.  Everything bad happens instantly.
• Get your customers to finance your inventory.
• Don’t finance anyone’s inventory.
• Good customers pay promptly.
• Bad customers are slow pays.
• Dump the bad customers regardless of size.  A large customer who is a slow pay will put you out of business.  See the first important point.
• Reward and risk have a complementary relationship, e.g. high reward equals high risk.
• A divorce over your business is a financial disaster.

I hope this raises questions in your mind.