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The rags-to-riches stories are considered fairy tales with a tinge of realism to them. The aspiring entrepreneurs, however, consider them more real than the reality. The likes of Mark Zuckerberg and Jack Dorsey inspire them too.
Many of them stay so engrossed in the dream of success that they fail to see the most obvious of hurdles. In this article, I reintroduce them to the reality, so they understand and the financial and other difficulties, laid in front of them.
In my opinion, almost all challenges that wannabe entrepreneurs face are financial, even when they don’t look so. In those occasions, the challenges are linked to bigger financial matters.
Getting success in an entrepreneurial venture depends on understanding how money is coming in, and how it is flowing out. A company’s balance sheet reflects how it’s performing, its sources of earning, how dependable these sources are, the reasons for cash-flow, how to reduce it, and so many other things.
Bookish knowledge helps, but the knowledge obtained from hands-on experience is more important. That’s possible only when the entrepreneurs face the challenges, and overcome them.
The challenges include writing an income statement. It’s not as easy as it seems. An income statement consists of sales, operating expenses, corporate tax, interest and dividends. Startups are new to an industry, and thus don’t have previous figures to put it in the statement.
To overcome the challenge, founders need to follow the history of established players in their industries. VC firms often help them through mentorship. Government funded incubation programs are for the same purpose.
Every business maintains a balance sheet. Startups often maintain balance sheets based on projection. For example, the starting balance is often the personal contribution of the owner. They keep areas like inventory, building and land empty, and only fill out the cash and the equipment section.
Sales and expenses both affect the balance sheet. So do loans. In case of established companies, the entries in those sections are not based on projection. But a startup company has to anticipate the possible expenses over the next few months. Initial sales are shown by them as account receivable.
Anticipating profit and loss, working towards realizing the projected profit are possible only if the entrepreneur adopts a
The approach prioritizes the future. At its core, it considers the revenues that the company will earn in the future, the possible operating expense, and the required assets needed to meet future demand. That’s possible via a shared vision. The startup owner needs to pay heed to advice from industry luminaries.
If your company belongs to the IT industry, attend webinars to speculate the future growth of the industry. Keep the balance sheet in mind when you do the marketing, deliver the work, increase the sales volume, separate a section of the profit as the future investment, etc.
When you devise a marketing strategy, you could anticipate how many clients, the strategy will bring and within what time. If anything goes with the plan, your balance sheet will not be the way you project it to be. Seeing the predictions coming true is more important than bagging profit because the former gives you control, the latter doesn’t.
Startup owners often mistakenly think they don’t need an experienced accountant onboard. Sometimes, they think they’ll hire an expert once their businesses flourish. The truth is they need a certified public account at every stage in their business. Tax filing, documentation and reducing cash-flow are the key areas where the suggestions of a CPA can be highly useful.
Most accountants use the Generally Accepted Accounting Principles or GAAP to handle the financials of a firm. Knowing the basics of GAAP is essential for a startup owner because that’d aid him in communicating with the accountant. A crucial aspect of hiring an accountant, who use GAAP is to be able to compare your business with other companies (both established and startups).
As said earlier, a startup needs to reflect the industry trends through the way it operates. That’s impossible without the help of an expert accountant.
Measuring the progress
Some startups have made profits, but only for a short time. They failed to grow afterward. Among many reasons for that, one is they couldn’t measure progress.
While measuring, take in stride the factors such as inventory level, time and effort for customer acquisition, employee contribution, treatment of customers, etc. These factors are indicators of a company’s growth.
Do you run a startup? Would you follow the tips given here in this article? Do you have any additional tips? Let us know in the comments.
About the Author
Tina Roth is an avid blogger who is an expert in the areas of personal finance and credit cards.