Author Murray Newlands is an entrepreneur, investor, business advisor and a columnist at BusinessInsider.com, Inc.com and Entrepreneur.com. He runs San Francisco-based PR agency Influence People and is the author of How to Get PR for Your Startup: Traction.
As an entrepreneur, you get quite accustomed to failure. Of course, there many reasons why a business doesn't succeed. Maybe there just isn't a market for your product or service. Perhaps you didn't assemble the right team. Or, you just didn't understand financial basics.
I've had my fair share of failures. When I first started out, I was running an agency. We were bringing in a lot of money every month -- and then we lost our biggest client. This was a huge blow to the company; we'd just hired four new people in the previous month, and now we didn't have money to pay for them or some of our other people. The experience taught me a lot of great lessons about finances.
To make sure that your startup succeeds, here are 5 financial lessons that I've had to learn the hard way:
1. Don't Be Concerned With Outside Investments -- At First
Whenever you hear words like "entrepreneur" and "startup," you may instantly associate them with "funding" and "investments." In my opinion, seeking out investments is a waste of your time and energy in the beginning. I've raised over $30M in the past 10 years for startups I've worked on, and I've never been able to raise money without bringing in at least $50K/month.
According to the Small Business Credit Survey, only a small percentage of new or small businesses borrow money. In the United States, only 18 percent of microbusinesses applied for credit at all; on top of that, businesses reported that it took about 24 hours to search and apply for credit.
At least at first, you're better off bootstrapping and applying for credit (or seeking investment) if and when you grow your operation into a much larger business.
2. Understand Debt Vs. Equity Financing
As Scott Shane of Case Western Reserve University writes on OPEN Forum, "most of the companies that get outside financing obtain debt, not equity." What's the difference between the two, according to NFIB?
Debt financing means secured loans that have been obtained by a bank and usually paid back in monthly installments. There are some major benefits; the bank has no input into your business, interest is tax-deductible and you know the principal and interest figures in advance (and can budget accordingly). But you do have to pay the money back in a specified amount of time, which can be an issue if you run into cash flow problems.
Equity, on the other hand, means raising capital through selling shares of your business to investors. This can mean more cash on hand and can be a boost to your credibility. That said, it takes a lot of time and effort, and you're giving away some ownership (and decision-making power) to your investors.
3. Borrow Only The Money You Need
Debt and equity are not your only options. Entrepreneurs have an unlimited amount of founding sources to choose from now. Whether it's borrowing money from a bank or family members, bootstrapping, finding investors or crowdfunding to get your product launched, the money you need is out there. That doesn't mean, however, that you have to get greedy.
Instead of raising or borrowing an excessive amount of money, only look for funding when you need it. Entrepreneur has a calculator that can assist you with figuring out much it will take to start your business.
4. Create a Solid Budget
A solid budget is absolutely essential for every business owner because it helps manage the your costs and keep your expenses in line. Every month, you and your team should review your budget carefully and adjust. SCORE.com has some excellent templates you can use.
5. Calculate The Cost to Acquire a Customer
You need to know your numbers. You should be able to tell an investor exactly what it costs to acquire a customer and how much that customer is worth to you in the long run. I've learned this over the years through countless investor pitches. Every investor will ask for those numbers, and if you don't know them, they will immediately tune out the rest of your presentation. I personally like to put them on the third slide of my 5-slide deck. Prove you know how to make a profit and that pumping in $5M into your business will make them money in the long run.
The Takeaway
Be financially prepared for anything and plan ahead. You never know what's going to happen next, but if you understand your financials, you can make informed decisions when you need to.