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8 rules of finance for entrepreneurs

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  • 1. RULES OF ENTREPRENEURIAL ACCOUNTING & FINANCE THE
  • 2. 01EVERYONE OWNS FINANCE
  • 3. 01EVERYONE OWNS FINANCE mature entrepreneurs differentiate between accounting & finance
  • 4. 01EVERYONE OWNS FINANCE accounting & book keeping ensure that all financial transactions are recorded & reported accurately finance drive enterprise strategy with financial insight
  • 5. 01EVERYONE OWNS FINANCE accounting can be delegated to a specialist but finance is integral to everyone’s daily activities & decisions
  • 6. 01EVERYONE OWNS FINANCE entrepreneurs who abdicate financial responsibility, for whatever reason, are just lame
  • 7. 02YOU MUST HAVE A FINANCING STRATEGY
  • 8. 02YOU MUST HAVE A FINANCING STRATEGY there are many sources of financing you must decide which type of financing to use & when to source it there are pros & cons for each type
  • 9. 02YOU MUST HAVE A FINANCING STRATEGY EQUITY Sell equity to founders, friends, family, or fools (investors). If you do well, this is VERY expensive and means shared ownership, but it comes with no interest obligations! LOAN Borrow money from a bank (loan, overdraft, or factor), credit card, or other suckers. Expensive interest obligations can bankrupt you, but you needn’t give up equity which might be worth millions later. INCOME The cheapest way to fund growth is to reinvest profit. However, it does mean that investors must forgo dividend payments. EXOTICS Check out crowd funding, government or university grants, or business plan competitions. Not usually big money, but good for additional uses (i.e.: marketing).
  • 10. 03YOU MUST HAVE AN INVESTMENT STRATEGY
  • 11. 03YOU MUST HAVE AN INVESTMENT STRATEGY smart entrepreneurs balance long & short term investments, and have a thoughtful approach to build, buy, or rent
  • 12. 03YOU MUST HAVE AN INVESTMENT STRATEGY your investment strategy should cover: • Fixed Assets (Plant, Property & Equipment) aka non- current assets. These are long-term investments that enhance productivity • Intangible Assets (i.e.: IP & your brand) • Long-term & short-term investments (i.e.: inventory, raw materials, accounts receivable, & treasury) • Operating Expense (i.e.: salary or debt repayment) • Dividends
  • 13. 03YOU MUST HAVE AN INVESTMENT STRATEGY your investment strategy should also align to your business model different industries spend differently for example, manufacturers spend more on Fixed Assets than do software firms
  • 14. 03YOU MUST HAVE AN INVESTMENT STRATEGY smart entrepreneurs review financial ratios (*) to compare against industry benchmarks (i.e.: Fixed Assets / Total Assets or Inventory Turnover Rate) * Your accountant can generate the ratios for you and the industry, but management must choose which ratios to use and must interpret the meaning of variance
  • 15. 03YOU MUST HAVE AN INVESTMENT STRATEGY performance against ratio norms may vary, but if they do, you better have an explicit, strategy-based reason "We're a software firm with higher than usual fixed assets. But it's OK because in our business model…."
  • 16. 04YOU MUST INVEST IN CLEAN ACCOUNTS
  • 17. 04YOU MUST INVEST IN CLEAN ACCOUNTS clean, accurate, and timely accounts are required for strategic planning, ongoing management, performance evaluation, & exit
  • 18. 04YOU MUST INVEST IN CLEAN ACCOUNTS while not all firms are required to perform an annual audit of the books, smart entrepreneurs do it anyway everyone makes mistakes and can benefit from a double check from time to time
  • 19. 04YOU MUST INVEST IN CLEAN ACCOUNTS and for Pete's sake: • separate business & personal expenses • store documentary evidence for every freakin' single transaction you ever make (i.e.: payment vouchers, payroll slips, receipts, signed contracts, bank statements & invoices) • invest in good accounting software and/or a good accountant • don't screw with the tax man
  • 20. 05MANAGERS NEED FINANCIAL & MANAGERIAL ACCOUNTS
  • 21. 05MANAGERS NEED FINANCIAL & MANAGERIAL ACCOUNTS good managers use 4 views of the accounts: • Historical – What can we learn from past trends? • Short-term – How do we respond to the immediate requirements of the next few months? • Mid-Term – What must we do now to maximize performance 12 months out? • Strategic – How can finance strategy help us achieve our strategic goals or undermine them if we don't act?
  • 22. 05MANAGERS NEED FINANCIAL & MANAGERIAL ACCOUNTS management should regularly discuss: Income Statement (P&L) What the business earned & spent over a given period Balance Sheet What a business owns and owes on a specific date Cash Flow Statement Sources & uses of a firm's cash over a given period Management Ratios The health of a business relative to benchmarks or historical values at a point in time or over a given period Sales Pipeline What revenue we expect & when for the next period (i.e.: 1-24 months) Cash Balance How much do we have in our bank each day and our forecasted daily balance for the next 1-6 months Accounts Receivable & Payable What do we owe & how much is owed to us for the next 1-6 months Payroll Plan Headcount costs for the next 1-12 months
  • 23. 06CASH IS KING
  • 24. 06 CASH IS KING you must always have enough money to run the business if you can't pay a bill that is due, the creditor may force you into bankruptcy even if you've got money on the way
  • 25. 06 CASH IS KING you must be very careful! the balance sheet & income statement recognize costs when incurred & income when earned, not when actual money flows in / out of the bank * Be aware of depreciation & amortization, so it does not trick you. Alternatively, consider skipping these during the start-up years to make things simpler.
  • 26. 06 CASH IS KING many profitable businesses go out of business each year because they temporarily run out of cash in the bank to pay their bills (cash flow crisis)
  • 27. 06 CASH IS KING be equally careful of growth, overtrading & over capitalization business is risk, but balance is critical when managing cash flow
  • 28. 07BE CLEAR ON YOUR LEVERS
  • 29. 07BE CLEAR ON YOUR LEVERS you only have a few levers that impact profitability, but each has many settings. these should be explicit and synergistic as part of your financial strategy • Price • Volume • Variable Cost (varies with volume) • Fixed Cost
  • 30. 08 THROW THE BUDGET OUT THE WINDOW, BUT DON'T STOP DOING IT!
  • 31. 08 THROW THE BUDGET OUT THE WINDOW, BUT DON'T STOP DOING IT! it is true that budgets rarely reflect reality
  • 32. 08 THROW THE BUDGET OUT THE WINDOW, BUT DON'T STOP DOING IT! however, the process of budgeting is healthy, like sit-ups budgeting forces everyone to think about the business as a whole, prioritize, and make decisions about trade-offs
  • 33. 08 THROW THE BUDGET OUT THE WINDOW, BUT DON'T STOP DOING IT! that said, smart entrepreneurs budget using a rolling 12-month cycle rather than one-off annually rolling budgets become iterative, drive performance, and become part of the day-to-day
  • 34. SHARE THIS DECK & FOLLOW ME(please-oh-please-oh-please-oh-please) Selena Sol asks….. http://www.slideshare.net/selenasol/presentations stay up to date with my future slideshare posts http://www.linkedin.com/pub/eric-tachibana/0/33/b53
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