Getting Started: Preparing for the world of entrepreneurial adventure (Managing Money)
Published by CPA Canada in CareerVision
Although you might think you know the meaning of the phrase “the buck stops here”, working with a start up company will reveal an entirely new definition. Call it life or death, the last quarter, the final frontier; money matters in a way that it never has before, and is a topic that will find its way into most conversations, from morning til night.
In comparison, most who work in the corporate world think about money in just a handful of ways: the paycheque (and when it’s coming), annual raises (and the likelihood of getting one), what the next job pays (and is it worth the trouble), and perhaps, whether the company has a budget for a particular initiative or event. Most of these interactions seem distant, somewhat detached, and of a lesser frequency. In a lot of ways, there is a relative amount of stability in these periodic musings.
Working with a start up or, what investors often refer to as “early stage”, company can be an exciting place, but it’s important to fully consider what’s involved before making the switch. In this series, we will do exactly that, so you can make an informed choice, and perhaps, benefit from placing a greater emphasis on developing some of the skills that will serve you well in advance of when they’re actually needed. So far, we’ve considered the implications of risk and the ever expanding job description. Let’s move to the issue of money.
Why it Matters
Start up companies are often born from ideas, not to mention the endless enthusiasm of the entrepreneurs who lead them. As with building a new home, start ups have a tendency to need everything, from supplies, to people, to technology. These are basic costs that are often funded by the founders and typically have little to do with attracting customers. Before long, a young bank account can find itself empty, and often much more quickly than expected.
With some of the novelty having worn off, (but, enthusiasm not dampened), entrepreneurs start to more fully appreciate just how much is involved in attracting and maintaining customers. Familiar phrases at this stage include “long sales cycle”, “it’s more work”, and “not what we expected”. Converting leads into sales and having the resources to fulfill the needs of customers require money, and guess what? It’s often needed in advance of receiving customer payments, which makes the need for cash flow management (and actual cash) all the more critical.
Those who work in the start up world need to find comfort with this “edge of the razor blade” existence, otherwise what they’re trying to build probably won’t be around for very long. The reality of being in this situation can be a shock to the enthusiastic system of those who truly believed that the world couldn’t live without their product.
Building a new relationship with cash can be difficult, especially when it’s unexpected. The good news is that you can plan for it, making the transition less daunting. Here’s how to get started:
- Review your expenses: Take a look at your current expenses to fully understand what they are (you might find some surprises during this process!). Identify items that could be cut or reduced, and think about the lifestyle changes you could make, if necessary (is now really the time to get rid of your roommate?). This will provide you with a baseline of information and some alternatives for when you’re ready to enter the start up world.
- Build a war chest: Cash in the bank provides both security and options, and saving in times of a steady paycheque is seldom regretted in the future. Recognize that working with a start up could (and likely will) result in unexpected expenses and an uncertain income stream, so take advantage of cash flow while you have it.
- Take cash flow management to a new level: Cash flow forecasts are often something that is part of an accounting education; mechanical, at best, with less emphasis being placed on accuracy and outcomes. Start ups live and die by their cash flow, and if you haven’t managed money in an environment where results are everything, expect a white knuckle ride. Take the opportunity to get some practical experience by managing your own cash flow and see how well you do.
- Expect the worst: You might be wondering where the “plan for the best” portion of this phrase went; no need to mention that, as entrepreneurs have it covered! You can be a valuable resource by planning for the downside that will happen, particularly in terms of money. Be sure to build in contingencies for delays and potential customers that will change course midstream.
One of the main reasons why young businesses fail is simply because they run out of money, and this can have little to do with the quality of the product or service that they provide. Surprisingly, growth actually requires cash. Learning how to work with money in advance of having to do so is a bonus on all levels: improving your comfort level (or managing your anxiety), providing realistic information, and increasing the likelihood that the company will survive. You hold the key to ensuring that the buck stops on solid ground.
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