Not everyone who runs a business is a financial wizard. And why should they be? People go into business for a variety of reasons – to transform something they love into something that pays; to honor a family tradition; or for the freedom of working without a boss – not necessarily because they’re good with money.
Yet, a company’s financial operations are key to its success. That’s why Eric Siegel, an adjunct lecturer in management at Wharton School, believes that any entrepreneur who doesn’t understand finance ought to hire – or, at the very least, consult with – someone who is.
Siegel, who is also president of Siegel Management, a firm that provides strategic support to middle market growth companies, offers these best practices in finance for entrepreneurs who run small and mid-size organizations:
- Get busy forecasting. “If you don’t know what your need is, how will you address it?” asks Siegel. “You understand your needs by forecasting cash flow, which is different from income or a balance sheet. It is cash flowing into and out of the business.” Siegel recommends projecting cash flow by the quarter. “But it’s even better if you can do it monthly,” he says. For example, on January 1 you have $100,000 in the bank. You’ll have money coming in and money going out. So, on February 1 you project that you’ll have $400,000. Now, by projecting how much money will flow into and out of the business month after month, you can see that your low point will be August 1, a couple of months before your big customers pay their bills. You project that on August 1 you will be down to your last dollars. In that case, you’ll need some financing.
- Anticipate the need early. “However long you think it will take you to raise funds, it will take you longer,” warns Siegel. “Even in more robust times, things come up, you may have to wait. A loan officer could be on vacation. So anticipate the need as far into the future as you can.”
- Economize. Some people think the more money you raise the more you succeed. “But that’s not true,” says Siegel. “Can you lease, not buy? Can you maybe pay some people in equity? Do you offer perks that offset high salaries?”
According to Siegel, some people have a propensity for talking in financial terms, while others – typically, creative or sales types – just don’t look at the numbers. “Some business owners are like the guy who doesn’t want to visit the doctor because he might hear bad news,” he says. Bottom line for entrepreneurs: Don’t be that guy!