1. Understand and accept responsibility for the myriad of tasks that fall on the shoulders of the Entrepreneur. Running a business is a lot more than making a better mousetrap and selling more of them. There is a wide variety of responsibilities that cannot be ignored.
Each one must:
a. Be performed by the owner personally, or
b. Delegated to competent employees. And remember, delegate doesn’t mean “send & forget”; you need to insure satisfactory completion. The definition is “to entrust (authority, power, etc.) to a person acting as one's agent or representative.” Even though you give someone else the power to act, you are still responsible for the delegated actions of your agents. You need to supervise, review and confirm satisfactory completion.
c. Performed by a qualified outside service provider, such as your CPA, benefits consultant, outsourced IT provider, etc. This is another form of delegation and the responsibilities are the same, although many professional service firms will guarantee the quality and provide the technical supervision. That’s why you pay them so much more than an employee.
2. Understand the fundamental concepts of financial management. You do NOT need to be an accountant or a financial manager, but you must understand the basics. Get coaching if necessary, but you cannot delegate this part (except perhaps to a partner that you trust completely, but even that has major risks).
a. What is cash flow? What factors affect cash flow and how can you manage it? At some level, most entrepreneurs understand this concept intuitively, by managing from their checkbook. But you will soon outgrow the ability to do that. If your standard financial reporting package does not include a cash flow statement, you are neglecting a key component of your management responsibilities.
b. Debt versus Equity. Know the difference, both from a rights and responsibilities perspective, and from the impact on your financial statements and how those financials affect your relationships with investors, lenders and owners.
c. Performance metrics such as Current Ratio, Debt Service Coverage Ratio, Value-Added, Sales per employee, and so on. There are dozens of possible ratios; you don’t need to be able to calculate them personally, but you should, in consultation with your partners and financial advisors, select a few key metrics that reflect the primary drivers of your business. For those key metrics, you need to understand fluently which attributes of your business drive those metrics, and therefore understand what is happening when those metrics change. That’s the whole point of course: metrics tell you what is happening; you understand why, and you make course corrections to solve the issues.
3. Relationships are critical. We all know that intuitively, and we develop relationships with many other business people because we like them or sense that they can help us in our business.
a. Don’t assume that you have all the relationships you need. Evaluate your businesses’ needs; identify fields of endeavor, types of expertise that you might need in the near future (one to three years) and make sure that you know someone with the necessary expertise and start to build the appropriate relationship. Each situation will be different but plan ahead. If for example you expect to be hiring a significant number of employees, make sure you have a relationship with an attorney who has sufficient expertise in labor law, identify the types of benefits you might need and explore appropriate consulting and administration firms, be sure your CPA can either do your payroll, teach you how to do it or introduce you to an appropriate service bureau, find a good recruiting firm, and so on.
b. Certain relationships are much easier if you get to know the right people BEFORE you need them. This can be a challenge because you can’t always be sure exactly what you will need a year from now. You will still be better off if you start earlier rather than later. If, for example, you think you will need to borrow money someday, get to know two or three bankers NOW. If you spend time with people, you will get to know each other better, build mutual respect and know that your two companies can do business together when the time comes. Banks are very similar to each other, but they also have individual personalities. Some will not loan to certain industries, others will; some are not comfortable with early stage businesses, but others are. At the very least, explore lending parameters and criteria where you currently have deposit accounts.
4. Manage your business for long-term value, not just for short-term earnings. Many businesses, being sensitive to cash needs, especially in the early years, get in the habit of maximizing tax deductions to the detriment of building a strong balance sheet. Don’t fall into the trap of complex tax structures that are expensive to manage and make it hard to see the underlying attributes of the business. Don’t ignore S-corps, conversion from cash to accrual basis, or a family limited partnership just because the effort is complex and expensive. But anytime you consider a deal or a new structure for some aspect of your business, do this: First, analyze the opportunity and determine whether it makes sense (adds value) without regard to the tax consequences. If it doesn’t work without the tax benefits, maybe you shouldn’t do it. Once you’ve decided to proceed (but before you enter into any legal agreements about how to proceed) ask your CPA for the best strategies for minimizing tax liabilities with the new “deal” added to your company. Please understand that one of the fundamental metrics desired by any lender is equity in the business. If you maximize the tax deductions to the point that your business has insignificant hard assets and little equity, borrowing is not possible. Examples: [1. Owner purchased all assets personally, leased them to the company; assets were physically in the building, but not on the balance sheet; Result: no collateral available. Company made good income, but owner took it all out to repay initial investment and to fund his lifestyle, leaving the company with only $20,000 in equity after earning $400,000 in three years. When the company wanted to borrow, the bank said NO.
5. Every business needs a strong business planning process. A business planning document sitting on your bookshelf is worthless; the business planning process is invaluable. Having been through a thorough business planning process, you will understand the drivers in your business, and the impact that changes can have. No one will have a plan that works perfectly; no plan survives first contact with the real world. But when the unexpected happens, you will be far more able to deal with it if you understand the relationships that drive your business. And just so you understand, I have seen many experienced business people, good managers, walk away from their first planning process with a big smile because they feel so much better prepared than before they started.