Entrepreneurial Finance – Strategies to Support Growth
From the World English Dictionary:
Entrepreneur – noun. The owner of manager of a business enterprise who, by risk and initiative, attempts to make profits.
Leaving the security of a 9-5 job, and more specifically - a reliable paycheck, to create a business requires extensive planning and preparation. The securing of financial safety nets and capital is a top priority for new entrepreneurs, and with good reason. The risk involved in creating a business is not one anyone would consider minimal; and accepting such a challenge without adequate funding can, and often will, result in disaster. It makes sense, then, that entire industries have been built around the concept of the “start-up” and the process of developing and ultimately launching a new brand.
That one survives the entrepreneurial process at all is its own reward. Surviving the process with positive cash flow and a solid outlook on the future is akin to hitting a mega-millions jackpot. Unfortunately, once the excitement has waned and reality begins to set in, the cheerleaders disappear and business owners are left with little direction on how to use their profits wisely. It’s time to create a new plan – one that will make the best use of your company’s earnings and keep it moving in the right direction. But where do we start?
I sat down with Jim Kieckhafer, one of the founding Partners of Kieckhafer Schiffer LLP and KS Financial Advisors in Irvine, California, to find out what advice he gives to his clients, and how the rest of us can put that advice to work for ourselves.
Find an Advisor
“An entrepreneur’s passion lies in the creation and execution of their vision. Their chief focus is bringing that vision to the marketplace, not the accounting and reporting that goes alongside those efforts. A financial advisor will guide you through the process of financial reporting, and teach you how to use financial information to improve profitability and productivity. They’ll get you through the technical accounting issues, then stay on board to keep the business focused on meeting its long term goals by pointing out opportunities and areas for improvement.”
For many entrepreneurs, the primary obstacle to financial success is their own lack of knowledge and experience with business finance. And taken in context, this statement makes sense. I would wager that very few get up each morning with a burning desire to analyze a financial statement. But, analyze financial statements you must – and the right financial advisor will help you understand what all of those spreadsheets really say about your business.
Understand your financial statements
“Manage your ratios to create opportunity, and benchmark your performance against competitors.”
If the very mention of the word “ratio” sends you straight back to the horrors of middle-school math class, you’re probably not alone. The truth is, however, the ability to analyze your financial statements and some key ratios is necessary if you’re to properly understand the health of your business. Small changes in one area may have a significant impact in your organization.
For example, your financial statement ratios can help you determine where your business is relative to its debt obligations, or if you’re in a position to finance additional opportunities without overburdening your existing assets. They also provide insight into the efficacy of your collections process and management of inventory levels.
Benchmarking is the process of comparing a key set of performance indicators to those of similarly situated competitors. Going through this process regularly will give you valuable insight into how trends are shifting within your industry, and any tweaks you need to make to your business plan to keep up.
“Keeping your company’s performance in each and every benchmark category equal to (at least) the industry median gives you a substantially higher probability of success.”
The good news is, benchmarking is one of the few business terms that sound much more complicated than it is. The better news is, knowing where you stand relative to your competition at any given time gives you a distinct advantage during the planning process. As a new business owner, the knowledge you’ll gain from the process is priceless – because just about every line item of your financial statement can be, and often is, benchmarked in one or more annual reports geared toward your industry.
Use the information available in these reports to make decisions about how much you should be paying in rent, how much inventory you should be keeping on hand, if inventory is turning around fast enough, or if you’ve got too much money tied up in it. Make changes to your processes to ensure you remain competitive, and that your funds are allocated appropriately. Doing so will likely free up cash that can be invested in initiatives meant to help you out-perform your competitors.
Spend Money on What Matters
The business world has become increasingly competitive, as advances in technology and global communication have provided almost unlimited options for potential clients to choose from. Regardless of your industry or service model, flexibility and adaptability are crucial to keeping pace with your competitors. Focusing your resources on a few key areas within your organization will maximize your growth potential.
- Employees - Recruit, hire, and retain top notch talent. Your workforce is, and will continue to be, the single largest expense on your balance sheet. Benchmark your compensation plan to see how you stack up against your competitors, and adjust your approach as needed. Target candidates that are passionate about the organization’s mission and culture, and work to retain them with ample opportunities for growth and development. Encourage entrepreneurialism within your work force by rewarding new ideas and contributions within the framework of your total compensation scheme.
- Technology - It’s no longer a luxury, or even a choice. Thanks to constant advances in technology, businesses are now able to produce more with less lead time and fewer errors. Jim points to his own organization’s use of CCH’s ProSystem fx Scan technology to demonstrate the operational impact of technology investments, stating
“The process of transferring client information from hard copy documents into our tax preparation software used to require hours of staff time, as the information was keyed in manually. Technology has eliminated the need for manual data entry, allowing our accountants to spend that time analyzing the information. This has resulted in a higher quality product, at a reduced cost to our clients. ”
Technology, when used effectively, creates a competitive advantage by increasing the overall efficiency of your processes. The right technology will pay for itself many times over as your work-force becomes more adept at its use.
- Customer Service - A well- executed client service program is essential to the growth of any business. We are, at the end of the day, at the mercy of their satisfaction with our product or service, making our ability to produce revenue largely dependent upon how they view their experience with us. Investments in customer service oriented programs, such as survey and feedback initiatives return valuable information about what your customers want, and where your organization can improve.
It’s important that you invest in areas of your organization that will provide you the best opportunities for growth. Failure to spend wisely and strategically may force you into choices that are ultimately less favorable to you, or your business.
The planning and financial aspects of running a business are almost certainly not what lure anyone into an entrepreneurial venture. The good news is the stress associated with processes like these can be greatly eased with the presence of sound financial advice and a great team of business advisors. Over time, the ease with which you are able to comprehend the metrics that create value in your organization increases, allowing for continued forward movement and growth.