Stephen was not happy in his corporate job, so he decided to set up his own business.
He thought this might be a way to spend more time with his young family and although in his early 40’s and his wife also working, he did not want to continue in the same way as things currently were.
Stephen wanted to make a difference.
He had worked in technology for many years, so had an excellent understanding of the many complexities technology can bring, but importantly how intertwined technology is today in this global and disruptive world.
He had identified a gap in the market place for a particular application and thought he could design something which can then lead to something bigger.
It sounded like a game changer.
When I first met Stephen at my local café in the city, he was 18 months into this venture and his passion for his “big idea” was incredibly contagious!
I asked him how I can assist him and that’s when his whole emotional state quickly changed. He then went on to tell me about his financial challenges and that he is yet to make any sales.
Zero, zilch, nada…
I politely asked him as to what sort of money was he talking about to date and this is what he said…
“I have spent maybe over 1.5 million dollars and I am in debt for most of that”
As you can imagine this is a serious situation.
How would you handle it?
I explained to him that I am not suitably qualified to provide him with financial advice and suggested he speak to someone who is, for an independent review (please make sure you always do this). However, I did ask him about his prospects, the opportunity he sees and to no surprise, his emotional state changed once again.
(It always amazes me the power of managing emotional states – because we need to be in the most positive and empowered state if we are to solve many of these challenges that come into our lives – what you focus on influences our states)
He explained to me that he is more confident than ever of succeeding, as he had made several prototypes, continually reiterating the design and then improving it.
He felt he was so close to a break through!
Fortunately, also for Stephen is that he has a close family and his wife is OK about being the main income source for now, but he also recognised he should have done more research, particularly around the financials, before he started what he calls his “amazing gap year”.
While there is a lot to be said for Stephen’s passion and shear courage of leaving his old corporate job to go out on his own, there are additional skills and capabilities that may not always be apparent but are critical to success when setting up a business, no matter how small or large.
Sadly, in my experience and talking to my students and clients, far too many “Stephens” do not get up and running. Instead they crash and burn – meaning they do not know their “burn rate” of capital required to sustain their business, while it is starting up.
When you are setting up a business, you need to consider all the possible scenarios and then only apply the “worst case” to ensure you have contingencies in place.
Can you fund your “gap year”?
Perhaps it will be over several years or more?
These questions and more, need to be fully answered.
I believe fundamentally that there has never been an exciting time to set up and scale a business today in the age of the entrepreneur.
I am not saying it is easy though – you need to be prepared, you need to learn new skills and ensure you have the best mentors and coaches guiding you and challenging you and your “big idea”.
But when you do, you will find yourself in a new place and if you are like me and Stephen, you will be asking yourself why you did not do this years ago!
What If I told you everyone has four numbers! What If I told you, every business has four numbers as well!
You see, I consider these four numbers critical, yet so few people actual know them, or what they mean.
What am I talking about?
Here you go…
Income – money you receive
Expenses – money you spend
Assets – things of value that you own
Liabilities – things of value that you owe
Also, once you have these four numbers, you need to now do just two calculations – both are subtractions…
Firstly, take your income less your expenses and what do you have?
Second, take your assets less your liabilities and what do you have?
Are you still with me, or are you walking towards your open window…
Well whatever the answer is, it is what it is.
Now you need to draw on more courage and do these calculations on a regular basis – for me it is weekly.
What are you seeing now? What’s the trend? Is it going the way you would like it to?
Surprisingly so few people know their numbers. Even some very educated and highly paid professionals who have significant responsibility in companies – hard to believe isn’t it – but sadly it is true.
In business this is also a too common a situation.
The business owner, founder, entrepreneur who is not on top of their commercials or the financial health of their business is putting in jeopardy the longer term viability of their business. Because by knowing these four numbers on a regular basis will give you the much needed information and insight to make better informed decisions and appropriate corrective actions.
I am not sure why financial literacy is at this low level. However, from my experience, I have found that when things are not going the way we want them to, and we know it, we do not want to have that reality validated by a set of numbers. Like think about the bathroom scales that is put away and out of sight, or the credit card statement…
This situation of denial has to change. We have to change this mindset if we want to be set free.
But what is being free?
Well I think that is a personal answer and while there is certainly common themes I am sure we would all like to obtain, from a monetary point of view this will vary. However, the same four numbers and the two calculations remain.
So what can you do?
Well here are some suggestions – but as always, this is not advice – you need to obtain your advice from appropriately qualified people for which in finance we generally look to accountants and certified financial planners.
However, there is nothing wrong with reading broadly and for you to identify common themes people often refer to and then forming you own views and opinions. This after all is about being informed.
You need to do this at least…
First – Know Your Numbers
Determine your four numbers now and do the two calculations
Second – Keep Records
Put in place a system to record all your financial data in one location and note, this is not a shoe box, or sticky notes posted on the kitchen fridge. Please do not do this!
Instead, at the very least, maintain a hand written book written up with columns and sub totals, better, spreadsheets on your computer, best, use accounting software like Quicken, MYOB, Zero etc.
If you are a business, your only decision is the accounting software package – no paper based books OK.
I have used Quicken for my personal and business since 1996. The records are detailed and up to date. It has become a habit. This information allows me to do my annual tax return in little time, juggle funds around accounts and project cash flow. I have not always liked what I have reported on, but I have been able to make quality decisions because of this information.
As my businesses become more complex, I now need to scale and am implementing Zero – key reason is for the integration possibilities as I am implementing a greater level of automation into my business.
Third – Backup Your Records
Also make sure you have backups in place in case of an incident. For example, what happens if your computer crashes – what do you do? So using technologies like Dropbox that replicates files in the cloud is the way to go.
Fourth – Report & Review
Depending upon your business and where you are at, you want to have a cash report prepared. Your software will do this and if it is linked to other accounts such as your bank then this can be live and pulled at any time you need – some businesses do this twice daily.
Look I know what I am saying is so basic, but the reality is few people get it.
Please do not be one of those people. You do not have to feel overwhelmed and think that financial knowledge, whether that be for you personally or for your business, is only understood by accountants.
Please do not under estimate your abilities here. As I have explained, if you get a handle on those four numbers (Income, Expenses, Assets and Liabilities), do the two calculations and measure them frequently you will be in a much better position.
If you are already good at it, then teach it to others. Especially children, teenagers and young adults.
Everyone deserves better health both physically, emotionally and financially to set them free.
It was one of those awkward moments on television.
There he was, putting in his pitch to some savvy business entrepreneurs, for them to invest in his business and then came the question…
“So how much equity do you have in your business already Ryan?” asks the Shark.
“What do you mean?” said Ryan (I am calling him Ryan to protect his real name)
“Simple question, how much do you have in your business, what does it say in your balance sheet Ryan?” said one of the Sharks.
“You would have to speak to my accountant on that, she looks after all of that” responded Ryan as he started to tap dance.
Camera pans back to the Shark for a close up to capture awkward facial expression, cut back to Ryan for close up on sweat beads forming, cut back to the other Sharks, blood is now in the water. Now cut to commercial break!
Well reality television can be cruel as it is aimed for suckers like me to watch, so we have to give Ryan credit for his courage to go on the show in the first place. Also what he was offering to the market appeared quite interesting and looked like it had potential, particularly from the initial enthusiasm from the Sharks. However, Ryan did not have a more rounded view and understanding of his business particular in respect to the financials.
This comes back to the importance of having the right support and being commercial when you are setting up or running a business.
You are the entrepreneur, the visionary, the creative talent, the networker who gave birth to this business, but you are also ultimately accountable for the business’s financial control.
Sure, I get you are not an accountant, but as I often say to my clients, you need to have a basic understanding and familiarity. If like Ryan, you had the opportunity to pitch your business to potential investors, would you not want to be on top of your numbers?
So perhaps sometimes it’s useful to see what happens in large established companies, particular at the annual shareholders meeting, or annual profit announcements.
Who do you see standing to the side of the CEO in these forums?
Well typically it is the CFO or Financial Controller. Now in these meetings the CEO will provide the overview and broad achievements and objectives going forward, but in most situations the CEO allows the CFO to provide the detail on the numbers. Also you can bet they have rehearsed their presentation beforehand, as there is a lot at stake. Any negative sentiment will push the share price down, or positive sentiment pushing it up.
Investors seek leadership, growth and consistency.
Coming back to Ryan, what advice would you had given him in preparation for his pitch? Perhaps for next time hopefully?
What about if you are in a similar situation as Ryan, what should you do?
Maybe having a the detailed financial understanding of your business is just not your strong suite. Also, being a startup or small micro based business, you of course do not have the same resources available like an established company does.
So what can you do?
Well the first thing is recognising your strengths – what you are good at and what is an area where you are not as strong as you should be? Also, you should appreciate the need of having strong financial capability in your business – even from the start.
So hence, there could be a gap between what you have now and what you need, would you agree?
That is why you need to identify “partners” that can provide this necessary commercial support.
Do you have an accountant that can provide this? Have they bought in to your vision and can also ask the necessary questions to keep you grounded?
They may not have a financial stake in your business, only that you are one of their clients, but that does not matter – it’s their financial acumen that you are seeking.
However, to reinforce an earlier point, you are still accountable OK? You have not relinquished your accountability for financial control. You have delegated the task, but not the accountability for the task – is that clear?
Now let’s go back to Ryan. If we could go back in time and re-set the scene like this…
Ryan is preparing for his pitch with his accountant Susan. Susan who knows Ryan’s vision and supports it, has prepared all the relevant financial numbers, projections and scenarios and even on simple charts for a visual representation. They have also agreed between them that Susan participates in the pitch as Ryan’s financial advisor. They have agreed as to who would present what and when.
Lights, action, camera, cue Ryan…
“Thank you for allowing us to present an opportunity for you to invest in the xyz business. We are excited to be here, to tell you our story and importantly vision for the future – and it’s an awesome one!”
“When starting a business, it is critical to form the right partnerships early and Susan is here as my financial advisor.”
“One of the things I first recognised, is my strength is in creativity and relationships and not financials, but of course this is a critical area, that’s why I have Susan here as well, to provide any further detailed explanation that I may not initially be able to answer and to demonstrate my approach to business is bringing in the right people at the right time.”
“Hence it is time to take the business up to the next level and that is why we are here talking to you today…”
Well maybe not exactly to the script, but do you think it possible Ryan’s demeanour would now be different and although difficult questions were still to come from the Sharks, he had at least positioned himself and the back-up with Susan present, if he indeed needed it?
Nothing of course is easy but in my view a combination of hard work, discipline, being strategic and recognising your own short comings will place you in a much better position than probably 80% of you peers.
OK you decided to go into business because you want to make the world a better place.
You are awesome!
So how’s that working out for you?
Are you making progress?
Do you know how much money you are spending daily?
You see the difference between people who trade their time generally for money (i.e. those who have a boss and a job) and those who trade their passions for other outcomes (i.e. entrepreneurs) is that the cash flow is not always clear or regular, particularly when you are starting off, in the startup phase.
So if you are to make progress you need to be commercial and that starts with you being financially savvy.
For example, do you know your burn rate? That is, how many days, weeks, months or even years that you need funding to get your big idea up and running? What income sources do you have? Are you sufficiently commercial to engage with financial backers, banks and independent investors? Or are you just going to hack at it and hopefully bust through?
Well if you read the stories of successful entrepreneurs, all approaches achieved results. It’s just that some of these entrepreneurs today when looking back, would say they would have taken a less traumatic path than the one they did.
Learn Financial Management 101
Look you do not need to become a financial expert, there are plenty of people who can help you here, but you do need some basic skills such as understanding cash flow, profit and loss, balance sheets and how to set up the financial structures. This is important because as your business grows and more transactions occur, you need robust controls in place. From my experience it is far easier to have things in place on day one and then scale, rather than try to implement controls when things are out of hand – in fact it is often at a recovery situation by then.
For example, if you are starting out, you often may revert to using your personal credit card for specific business purchases. While it may make no sense in these early days to set up a formal company structure, what may make sense instead is to set up a separate bank account and apply for a separate credit card. Although the credit card is still in your own name, you are now making a specific distinction between personal and business expenses. This also makes it easier at tax time as much of the work has already been done for you.
Taking it up a level, is to invest in accounting software. I have been using Quicken for years. I love it because I am so familiar with it and keeping it updated is a routine, at any time I can run a quick report or query and know exactly what my financial position is. However times change and now I am moving towards using Zero. I have researched various products and have concluded that this will suit my needs going forward – largely for its cloud based platform, scalability and integration features.
Now obviously this is not advice, so please speak to someone qualified in this area to discuss your needs. However what I have found that by putting in place the basics at the early stages, a strange thing happens mentally and emotionally. The very act signals an intent in your deeper consciousness that you are dam serious about this and while there is still a lot of blood, sweat and tears to come, you have stepped up to say to the world: “I am an entrepreneur, bring it on”! Furthermore, this sets up the foundations of expanding your financial management skills for the future – for example, when you are negotiating on a buyout!
Become Familiar With Your Legal Obligations & Strategies
Well, I am certainly not going to say too much here, after all there are people who can help. However let’s just make a list of some topics or themes that are to be considered and again to minimise my liability, this is not advice OK and this is not a comprehensive list, this is from a quick search on the internet from a couple of blogs… are you getting the picture of my claim to expertise here!
Copyright and Intellectual Property
Terms & Conditions / Contract Law
Anti Money Laundering
Again seek out expertise in this area. There is nothing wrong about using the internet for your initial research. For example, many countries have government departments set up to assist business. In Australia, the business.gov.au site is a great place to start with a whole lot of resources.
When it is time to speak to somebody, talk to those in your own network to see if you have any referrals. See this as an interview process, yes you want somebody with the skills but are they also aligned with you on your journey? To me this is very important because they will be part of your extended team that you are putting together.
Get A Handle On Your Risks
Corporates invest in hundreds of millions of dollars each year in identifying, controlling, preventing and mitigating risks from anything to brand damage through to information security. Of course as a startup, you do not have those resources at hand, but you still have risks and if they eventuate, they can be catastrophic.
So again you do not need to be an expert here, but it can start as simply as writing down a list of categories and then taking time to think about them on two dimensions:
Firstly, how likely is this risk to occur?
Secondly, if it occurs how big an issue would it be?
For example, what is the likelihood of your website crashing? What is the impact? What about after 24 hours, or after 48 hours?
You can build on this exercise and even allocate scoring and then graph all your risks on a 2 x 2 matrix if you are that way inclined (there are people who like graphs you know!) or do this same exercise on a napkin while you are getting your caffeine hit. Either way, get visibility on them and then ask yourself the next two questions:
What do I need to do to mitigate these risks?
What do I need to do if they occur – what’s my contingency?
So please don’t diminish your passion for your business and of course the important reasons why you are doing all this in the first place, but be commercial. If you put in place sound financial, legal and risk management structures from the very start, you are building a solid foundation for your future legacy.
I am sure we all have stories to tell around customer service that we have received or at least observed and perhaps these stories are not always about great experience either.
I have also attended client meetings in a corporate setting, where one of my colleagues spent most of their attention during the meeting checking their emails! Unfortunately I was not sitting close enough to kick him under the table, but I think in that particular scenario, it was just that my colleague had been around this client for too long and there was too much familiarity and as a result he had forgotten his role. He had become stale, lost his mojo as Austin Powers would say.
Of course though, there are businesses that really get this right and their approach is very professional. When I come across this I am always intrigued to find out whether it is the individual, or part of the culture of the business when there are several people working there. It is always great to discover its part of the organisation’s culture and DNA – it has become embedded – its how they do things.
You see when businesses perform in these optimal states, it is more likely that the behind the scenes, mirror what we all see publically as customers and clients or investors.
There are goals, targets, clear roles and responsibilities, systems and processes that provide the necessary support. However even when all this is present, there is still something else very important that needs to be in place. When businesses just starting off, small or even large have this, then they are much better positioned both in the short and longer term.
When businesses do not take this specific approach, well they are not looked at as favourably by their clients, or supporting organisations such as their suppliers, banks or the Shark Tank and typically there is inconsistency in their performance and subsequent uncertainty around their future.
This potential missing ingredient is what I refer to as being “commercial”. Of course when you are starting out, you do not necessarily need to appoint formal boards or committees, but you do need to step up and put in place sufficient rigour that controls your finances, manages your legal responsibilities and minimises your risks.
In future posts I will expand on how to develop your business acumen or commercial repertoire. For now though ask yourself these questions…
Do I have full visibility of my finances? Do I know my position on a daily basis?
Have I got a hand on all my legal obligations? Am I protected individually and is my intellectual property protected?
Do I understand what risk mitigation is? Do I know all the risks that could occur in my business and have I put in place contingencies where appropriate?
Finally, if I was to invest in this business as a sleeping partner, would I do it, or are there better ways I can get a return on my capital? (ouch)
If you are having difficulty answering these questions, then there are things you need to do and this may include research and education (many government departments provide a lot of great information), joining your relevant industry association or company directors organisation, drawing up a list of action items you need to work through, or even engage a business coach or seek a mentor. Any of these steps will certainly contribute to you becoming more commercial and in the longer term developing your own sense of business acumen or savviness!
Then and only then you may be ready for Shark Tank!
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