Finance hints for entrepreneurs and micro companies

A version of this article by Airfox Financial Advisor Douglas Lopes was originally posted in Portuguese by IT Midia.

Starting a company is not easy, and maintaining it in the early years can be a huge headache. We spend so long preparing to take the plunge, often leaving a fixed salary behind. It’s risky. Often, as soon as we open the doors, it seems we are hemorrhaging cash on a minute-by-minute basis. It helps to take some time and make simple adjustments, so that we control cash flow rather than cash flow controlling us.

As an entrepreneur, you can’t afford to put your head in the sand and hope that things will spontaneously resolve. This may have seemingly worked for you in the past, but the stakes are higher now. It’s vital that you have a thorough understanding of money as it moves and in and out of your venture, so that you can prepare yourself for a rainy day, and so that you have capital to invest in your business as it grows.

Below is a list of do’s and don’ts for entrepreneurs:

The important do’s of a starting a business

• Know your market. Many businesses close within months of starting operations. Optimistic entrepreneurs with a dream to own their own business open a hair salon, spending a fortune on the fit-out of the premises, but without analyzing the neighborhood. How many other salons are there in the area? Have other salons closed down recently? What is unique about what you’re offering? Why should a customer choose you above the guy next door?
• Do your homework. Is there a need for this service/product? Who else is offering it? What do competitors charge? Can people afford it? Do they need it on a daily/weekly/monthly basis, or is it a luxury item/service? Consider diversifying your offer — what else could your client require?
• Keep costs down. Keep account of all expenditure that relates to your business, no matter how small. This allows you to periodically review how much it really costs to keep your business afloat, and identify where spending can be cut in future months. Keep a close eye on promotions, and stock up when prices are low, but be realistic. Will it sell before it’s expiry date? Do you have space to store this item in bulk? Much furniture and equipment can be rented or bought second-hand as operations expand and your business grows. Keep growth manageable.
• Pay your bills on time. The early years of any business are the toughest, and profit margins can be very thin. Avoiding penalties for late payments can be enough to keep a business afloat. Set monthly reminders in your agenda, so you don’t forget when bills are due. Double check that bills are paid on time, even if you employ someone to take care of this.
• Know your numbers. Hire a good book-keeper, or do it yourself using accounting software available online, but don’t lose track of everyday cash flow. Keep accounts tidy and squared off on a month to month basis. This clarity will allow you to make informed decisions based on reality based projections. Project what cash flow will look like at least 6 months from now. If it looks like things will slow, decide whether they are likely to pick up again, and any action you need to consider. Access a micro-loan if needs be, to keep afloat in the short term.

Keeping track of your money is vital for new companies

Keep a close eye on monthly accounts, even if you hire a book-keeper to look after them. Consider doing a short online accounting course, so that you get a better understanding of good accounting practices. This way, you’ll be in a better position to make financial decisions, without unnecessarily putting your business at risk.

• Negotiate. When seeking new suppliers, don’t be afraid to negotiate terms that are agreeable, and shop around to find the best deal. What are the late payments penalties? Is there a workable grace period? Fully understand all of the terms and conditions before agreeing to anything.
• Likewise, ensure that you have thought about your own terms and conditions for your customers. What are their late payment penalties, do they get a grace period? Once you have solid terms in place, don’t be afraid to enforce them. A company that gets penalized for late payment one month, will most likely prioritize prompt payment next time.
• Send out invoices on time, to avoid anxiety while waiting for payment. Make it easy for your clients to pay. Offer alternate payment mechanisms like AirFox, a great option for customers that are tired of paying up to 20% of their salary each month in banking fees. When you use AirFox to make and receive payments, make sure your customers and suppliers are aware and understand how simple it is to use.
• Prioritize your needs. Ideally, your company will have an accountant, lawyer, etc. But, do you need to hire this full team from the outset? Are there ways to keep costs down for now? Can some simple legal documents be drawn up from online templates, or do you really need to pay the hired suit each time? Know your rights and obligations, to ensure you’re always on the right side of the law. Contact official agencies, that offer this information free of charge. Do lots of desk research. Invest in core assets to your business and use partners for less relevant services.
• Have an advisor: the top of the mountain is a lonely place, sometimes above the clouds, it is important to listen a lot and have someone you can trust to help you. Don’t choose a “yes man” but rather someone that respects you, and will provide the right counsel, not the one you want to hear.

Don’t forget the don’ts

• Don’t fall in love with your original idea. Thousands of companies were set up to provide a certain product or service, but ended being hugely successful in their 3rd or later attempt. Many companies fail because their owners are more passionate about their ideas than the reality of business. Don´t be afraid to change. Listen to your customer, know your market, and shift as necessary
• Don’t be afraid to fail. Fail fast, learn, but if it is not working, don’t sink with it. Up to 80% of small businesses fail within the first year of operations, generally because of administrative short-fallings, or due to a lack of understanding of the market niche.

Learn from your experience, and move on to your next venture. Just because this idea did not work, doesn’t mean another will fail. Brazilian Victor Santos watched a previous idea fail, before he created Airfox. He now holds the coveted “Innovator Under 30” accolade from MIT. Failure is part of the journey to success.

• Don’t forget to pay yourself. Many small business owners want to invest everything in the business, and forget to even draw down a salary themselves. Others grab all that is in the till, and forget about the business needs. Try to set aside around 10–20% of gross income every month. This money should be untouchable for day-to-day cash flow transactions, but available if the market takes a sudden downturn due to some unexpected event. Business is cyclical, so peaks and troughs should be expected. The fund is also there ready for use when you begin to expand.
• Working 24 hours hours, seven days a week is not the key to success. A good work life balance is crucial for your body and mind. Separate a mandatory time in your agenda for friends and family, and especially for you. Most of the creative ideas will come during these periods.
• Don’t splash out. Opening a new business is exciting and scary at the same time. Don’t feel the need to invest every last centavo kitting out the retail unit, only to realize you can’t afford the rent next month. Expect the unexpected. Make sure you have enough for at least three months in advance. Travelling for business? Skip the five star hotels for now. Keep expenditure modest, at least in the first years. Hold off on the gold plated business cards for the moment.
• Don’t forget that being an entrepreneur is not getting rid of your boss: your customer is your new boss. You might have the best idea in the world, but what good is that if no-one knows about it? Lay out a clear marketing plan, so your customers know who you are, where you are, and what you’re selling. Get your social media handles up and running, and encourage your customers to engage online. Happy customers are your best ambassadors.