Odds are you probably have seen a business plan at least once in your life. It could have been a well detailed spiral bound behemoth of a document or even scribblings on a napkin at the bar. (The scribblings are definitely my favorite!) The funny thing is about business ideas is that everyone has the capacity for great ones - I can think of at least three conversations in the last 24 hours that started, “You know what we should do next..”. The problem isn’t the visualization or the concept (OK, maybe that’s the problems sometimes.) it’s the detachment people have from the reality of the financials.
Also taking real action but, for the sake of this post, let’s stick to the gross underestimation of the need for and management of resources in a business. Being an entrepreneur can be an expensive endeavor and that goes for spending money or if you don’t have money spending time which by virtue of opportunity cost can also be measured with money.
Relatively speaking, money is not hard to come by these days. Credit is easier to get and there are amazing resources like Indiegogo, Kiva and Kickstarter to help get your project off the ground. Heck, you can even start a GoFundMe campaign if you want. The problem is that would-be entrepreneurs don’t understand how cash flow works and that it can get kind of expensive to take that napkin from the bar to a full blown business.
For the record, I really do understand that with very little liquidity, some time, and some great use of web resources you can launch a venture with a small budget.
But what next?
How do you plan to use the resources that are coming in the door to keep building your business? <<Cough Cough>> Remember, making deliberate choices is the heart of strategy...<<Cough Cough>>
Here are a few tips to get you thinking about your cash flows even before you really have them.
1. Get real about your expenses.
When you are small and your funds are commingled it’s easy to rationalize a monthly fee, some office supplies, a subscription, and maybe even rent in a co-working space without classifying them as proper business expenses. You are never too small to take your business idea seriously. Start tracking from the outset and you will be able to make more realistic assessments of the business and be able to allocate future resources that much better.
2. In the same vein as tracking your expenses you should be staying in line with GAAP - Generally Accepted Accounting Principals.
You don’t have to be a CPA to crunch your own numbers but you should have an idea around how and where your figures are coming from. That makes your tax preparers job easier - especially if that’s you. It also makes it easier for you to compare what you are doing to your competitors. If you are just making up accounting metrics and accounting systems on the fly it will compromise the integrity of your financial information. Figure out how your industry tracks their numbers and try to emulate that. It might not always be a perfect fit but you’ll be able to tell how you are doing against your market.
3. Have a collections policy.
Sending out an invoice is great. Getting paid 180 days later is not so great. An economist could argue that people are profit maximizing little automatons and I would say that works for businesses too. Not just in maximizing what we traditionally think as profit but also conditions, environments, and choices that make sticking around easier. What all that means is that you are going to hear excuses as to why people can’t or don’t pay. You may not be able to avoid the headaches that come with being paid on time but with a well thought out and incentivised invoicing strategy. Think “2% net 30” kind of stuff. This will help keep your cash flows relatively predictable so that you can plan around them, in good times and bad.
These three tips are not your conventional cash flow kind of tips. I know. But they are important factors to consider for your business. You can have all the spreadsheets and calculations you like but if it’s not quality information, if you aren’t collecting anything, and if you aren’t realistic about what’s going out the door then you won’t be in business long.