Promising businesses go under all the time. Unmotivated teams and stiff competition can drive startups to close shop, but research from CBInsights found that cash flow problems knock out 29 percent of failed small businesses. Without money to keep the lights on and employees paid, even a business with a great product and a bright future can shut down in a matter of days.
Cash doesn’t disappear on its own, though. To keep the coffers full, entrepreneurs need to remember what motivated them to start their companies in the first place — and recognize when personal strain starts to take a bigger toll.
“Being irreplaceable is huge for entrepreneurs,” said James Lenhoff, president of Wealthquest and author of “Living a Rich Life.” “You believe you’re the only human on the planet who can do it, so you do everything. In reality, if you can replace yourself, you can get out of your own way and give other people the gift of developing themselves.”
Entrepreneurs can’t afford to leave their finances to chance — or rest them on the vain hope that their efforts alone can sustain the business. Only through a conscious commitment to better management practices can founders keep their companies open and thriving.
Financial Advice: Why entrepreneurs should step back
Founders typically assume they know more about finances than the average person. Why shouldn’t they? After all, they started their own businesses, secured funding, and learned to manage multimillion-dollar accounts. They should know all there is to know about financial management — except they don’t.
Unlike traditional workers, who only have to worry about the numbers their employers give them and their finances at home, startup founders are in charge of all the money all the time. Every marketing plan, new hire package, and home renovation project crosses the entrepreneur’s desk. Without a solid understanding of how to run a growing business, those responsibilities can quickly become overwhelming.
To avoid that fate, founders should follow a few basic principles:
Understand the truth about credit.
Entrepreneurs starting their own businesses frequently need to use their personal credit scores to secure funding. Small business loans and lines of credit can make or break young companies; the better the score, the bigger the loans (and the lower the interest rates).
The principles are easy to follow: Don’t carry high balances, pay bills on time, and keep the oldest accounts open. Carrying a balance doesn’t necessarily increase one’s credit score; it just makes the borrower pay more in interest to the bank.
For people with bad credit, Credit Karma offers an easy-to-follow guide about how to build and maintain a good credit score from scratch. Those with better credit should read up on the basics and address any issues, such as incorrectly reported accounts, before they turn into bigger problems.
Account for the unexpected.
Successful founders quickly learn that the bills never stop coming, and they often come from unexpected places. The company might be prepared for spikes in labor costs, vendor changes, and advertising expenses, but what about legal fees, insurance, and other unexpected pitfalls?
Say a person walks through the office doors, slips on some coffee, and breaks his arm in a fall. Does the company have insurance to cover the expenses? What if someone uses the company’s product in an unexpected way and causes damage — does the company have a legal team, or at least a protocol in place, to address the lawsuit that follows?
Consult with a lawyer to follow the proper steps to set up a business. If the company deals with European clients, don’t forget to comply with GDPR. Even if the company deals purely in domestic affairs, set up GDPR-like data practices, anyway. It won’t be long before the rest of the world adopts similar measures to hold businesses accountable for breaches.
Separate personal and business finances.
The internet loves success stories about entrepreneurs who bet it all on black in Las Vegas to save their businesses. Unfortunately, online archives are less forthcoming about founders who emptied their personal bank accounts and still closed shop in the end.
Contribute personal funds to get the company started and invest in new directions, but don’t funnel money into a failing business out of stubborn pride. If the balance sheet looks bleak, take a hard look at whether the company is still viable. Move all the money into one last marketing gambit if necessary, but never take out a second mortgage when no one wants to buy the product.
Let drive lead the way.
Running a successful company is hard. When the worst times come and the future looks bleak, founders who don’t love what they do cave, while founders who feel passionately about their companies do everything they can to make it work. As Warren Buffett once said, “Being successful in almost anything means having a passion for it.”
Passion might be the wrong word, though. According to Mark Cuban, “A lot of people talk about passion, but that’s really not what you need to focus on…To be one of the best, you have to put in effort. So don’t follow your passions, follow your effort.”
Whether it’s passion or effort, don’t work for a company just to be the boss. Commit to something that will make the hard times worth it.
Most financial advice for entrepreneurs revolves around where to spend funding, but the real lesson is in mindset. Founders who learn how to set boundaries for themselves, learn from others, and plan for the unexpected are far more likely to succeed when their cash dries up.