8 rules of finance for entrepreneurs

8 RULES OF ENTREPRENEURIAL

ACCOUNTING & FINANCE

THE

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EVERYONE OWNS FINANCE

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mature entrepreneurs differentiate between accounting & finance

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accounting & book keeping

ensure that all financial transactions are recorded & reported accurately

finance drive enterprise strategy with financial insight

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accounting can be delegated to a specialist

but finance is integral to everyone’s daily activities & decisions

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entrepreneurs who abdicate financial responsibility, for whatever reason, are

just lame

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YOU MUST HAVE A FINANCING STRATEGY

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there are many sources of financing

you must decide which type of financing to use & when to source it

there are pros & cons for each type

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EQUITY

Sell equity to founders, friends, family, or fools (investors). If you do well, this is VERY expensive and means shared ownership, but it comes with no interest obligations!

LOAN

Borrow money from a bank (loan, overdraft, or factor), credit card, or other suckers. Expensive interest obligations can bankrupt you, but you needn’t give up equity which might be worth millions later.

INCOME

The cheapest way to fund growth is to reinvest profit. However, it does mean that investors must forgo dividend payments.

EXOTICS

Check out crowd funding, government or university grants, or business plan competitions. Not usually big money, but good for additional uses (i.e.: marketing).

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YOU MUST HAVE AN INVESTMENT STRATEGY

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smart entrepreneurs balance long & short term investments, and have a thoughtful approach to build, buy, or

rent

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your investment strategy should cover:• Fixed Assets (Plant, Property & Equipment) aka non-

current assets. These are long-term investments that enhance productivity

• Intangible Assets (i.e.: IP & your brand)

• Long-term & short-term investments (i.e.: inventory, raw materials, accounts receivable, & treasury)

• Operating Expense (i.e.: salary or debt repayment)

• Dividends

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your investment strategy should also align to your business model

different industries spend differently

for example, manufacturers spend more on Fixed Assets than do software firms

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smart entrepreneurs review financial ratios (*) to compare against industry benchmarks (i.e.: Fixed Assets / Total

Assets or Inventory Turnover Rate)

* Your accountant can generate the ratios for you and the industry, but management must choose which ratios to use and must interpret the meaning of variance

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performance against ratio norms may vary, but if they do, you better have an

explicit, strategy-based reason

"We're a software firm with higher than usual fixed assets. But it's OK because in our business model…."

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YOU MUST INVEST IN CLEAN ACCOUNTS

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clean, accurate, and timely accounts are required for strategic planning,

ongoing management, performance evaluation, & exit

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while not all firms are required to perform an annual audit of the books,

smart entrepreneurs do it anyway

everyone makes mistakes and can benefit from a double check from time

to time

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and for Pete's sake:

• separate business & personal expenses• store documentary evidence for every freakin'

single transaction you ever make (i.e.: payment vouchers, payroll slips, receipts, signed contracts, bank statements & invoices)

• invest in good accounting software and/or a good accountant

• don't screw with the tax man

05MANAGERS NEED FINANCIAL & MANAGERIAL ACCOUNTS


good managers use 4 views of the accounts:

• Historical – What can we learn from past trends?

• Short-term – How do we respond to the immediate requirements of the next few months?

• Mid-Term – What must we do now to maximize performance 12 months out?

• Strategic – How can finance strategy help us achieve our strategic goals or undermine them if we don't act?


management should regularly discuss:Income Statement (P&L) What the business earned & spent over a given period

Balance Sheet What a business owns and owes on a specific date

Cash Flow Statement Sources & uses of a firm's cash over a given period

Management Ratios The health of a business relative to benchmarks or historical values at a point in time or over a given period

Sales Pipeline What revenue we expect & when for the next period (i.e.: 1-24 months)

Cash Balance How much do we have in our bank each day and our forecasted daily balance for the next 1-6 months

Accounts Receivable & Payable

What do we owe & how much is owed to us for the next 1-6 months

Payroll Plan Headcount costs for the next 1-12 months

06 CASH IS KING

06 CASH IS KING

you must always have enough money to run the business

if you can't pay a bill that is due, the creditor may force you into bankruptcy

even if you've got money on the way

06 CASH IS KING

you must be very careful!

the balance sheet & income statement recognize costs when incurred &

income when earned, not when actual money flows in / out of the bank

* Be aware of depreciation & amortization, so it does not trick you. Alternatively, consider skipping these during the start-up years to make things simpler.

06 CASH IS KING

many profitable businesses go out of business each year because they

temporarily run out of cash in the bank to pay their bills (cash flow crisis)

06 CASH IS KING

be equally careful of growth, overtrading & over capitalization

business is risk, but balance is critical when managing cash flow

07BE CLEAR ON YOUR LEVERS

07BE CLEAR ON YOUR LEVERS

you only have a few levers that impact profitability, but each has many settings.

these should be explicit and synergistic as part of your financial strategy

• Price• Volume• Variable Cost (varies with volume)• Fixed Cost

08THROW THE BUDGET OUT THE WINDOW, BUT DON'T STOP DOING

IT!

08THROW THE BUDGET OUT THE

WINDOW, BUT DON'T STOP DOING IT!

it is true that budgets rarely reflect reality



however, the process of budgeting is healthy, like sit-ups

budgeting forces everyone to think about the business as a whole,

prioritize, and make decisions about trade-offs



that said, smart entrepreneurs budget using a rolling 12-month cycle rather

than one-off annually

rolling budgets become iterative, drive performance, and become part of the

day-to-day

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