The Financially Savvy Entrepreneur: Navigate the Money Maze of Running a Business

The Financially Savvy Entrepreneur: Navigate the Money Maze of Running a Business

by Emily Chase Smith

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Overview

80 percent of small businesses do not receive outside funding; they bootstrap (and beg and borrow) to make their business dreams a reality. As these businesses grow, the hasty financial decisions and systems put in place during their infancy inevitably crumble.

Banishing CPA-speak, The Financially Savvy Entrepreneur offers time-strapped entrepreneurs—indeed, all business owners—simple and innovative tools to maintain business and personal financial health.

Here's an understandable, step-by-step plan that will help you:

  • Understand how an entrepreneur's financial considerations differ from their traditionally employed counterparts.
  • Appreciate the danger of failing to revisit start-up decisions and give you a roadmap to ease financial entanglements.
  • Establish a business that can stand on its own financially.
  • Product Details

    ISBN-13: 9781601633170
    Publisher: Red Wheel/Weiser
    Publication date: 06/23/2014
    Edition description: First Edition
    Pages: 256
    Product dimensions: 5.20(w) x 8.20(h) x 0.70(d)

    About the Author

    Emily Chase Smith, Esq. is the Entrepreneur's Money Expert and a California-based attorney. Emily brings a wealth of knowledge from representing business owners in the "money morgue"—a.k.a. the United States Bankruptcy Court—to help entrepreneurs make financially savvy decisions as they start, grow, and transition in their businesses. She is a blogger and the host of the podcast Money Morsels.

    Read an Excerpt

    CHAPTER 1

    The Runway Equation

    The Runway, and Its Friendly Companion, Baselining

    The constant concern of entrepreneurs is that we'll run out of money before we can make our business idea a reality. We face this at the beginning of a business venture and several times throughout its life as we jump from tree to tree in the quest for the top. This is what keeps us up at night. Money worries sap our creativity and dampen our drive.

    And it's not only the money to run the business we need to worry about; it's also money to run our lives while we build the business. As we saw in the Introduction, we are not 9-to-5-ers who receive a paycheck from the top floor. We eat what we kill, and we need to kill enough to feed ourselves, our families, and our business. That's a lot of zebra.

    The concept of the runway is something I first discovered on The Lifestyle Business Podcast, from lifestyle entrepreneurs and those who write about lifestyle design. It provides a great framework for the idea of how long you can continue down a path before running out of time or money. It's modeled on the idea of the amount of runway an airplane needs in order to take off: With enough runway a plane can get into the air. Without enough, you have a tragic situation.

    The idea of the runway is best understood in the context of the lifestyle entrepreneur's reality: that of a twenty-something straight out of college, with big dreams. So picture yourself at the beginning of your working life, with all your entrepreneurial zest, but none of your hard-learned lessons. Now take away all ties to the physical world except for the love of your family. Now you have no encumbrances, but you also don't have the resources you may have come to rely upon — no savings, no 401k, no home equity. As you fashion your life from scratch, what would you do to launch your big dream? Eating ramen noodles, the staple of college students the world round, comes immediately to mind. As a free bird you might rent a small apartment in a less-than-desirable area of town. If you were really hardcore you might couch-surf your way to nearly zero overhead. Your car would be sold or downgraded to the bare minimum. Meat might not grace your plate for weeks. This type of lifestyle is known as baselining. And as the young and naïve understand, baselining allows you more runway — in other words, more time — to make your dream a reality.

    The runway concept is equally applicable to the more seasoned entrepreneurs with existing businesses and established lifestyles that don't lend themselves well to friends' couches or weeks of ramen. Remember our bastion of progress, David? One of his pivotal steps was to take a long hard look at his business and personal expenses and cut them where he could. Cutting his expenses down to the lowest necessary amount gave David the wiggle room he needed to bring his books strongly into the black.

    Let's take a look at the elements of the runway to see how you can use it to your advantage. The equation, penned by this non-math nerd, is:

    Time + Money = Runway.

    Let's break it down.

    Time

    I don't know about you, but when I conceived the idea for my business (and the one before it and the one before that) I thought I was just about the most brilliant, intuitive, creative businessperson who ever hatched a business plan. My mad, former-secretary typing speed of 60-plus words per minute was no match for the fast flow of cutting-edge ideas pouring from my head. A 30second elevator pitch couldn't contain me; there was just so much to say. I was white hot. Six months later I looked back on that efficiently typed business plan with disdain. A little reality showed many of my cutting-edge ideas to be more suited to the cutting-room floor. I had spent large amounts of money on ridiculous ideas, and I had much to regret. I know I'm not alone in considering my business plan to only be worthy of lining bird cages.

    When traveling, conventional wisdom says to take half as many clothes and twice as much money as you anticipate you'll need. Similarly, a seasoned entrepreneur knows that every business, even the ones that get your blood flowing, will take twice as much time and twice as much money as you plan. How can that be? Robert Burns said it best: "The best laid schemes o' mice an' men / Gang aft agley." (In other words: The best laid schemes of mice and men / Often go awry.) Time gives us the opportunity to be successful. Think about your goals when you started your business. What was your revenue goal? How long did you think it would take to achieve it? (It's okay to stop for a little chuckle here.) Imagine your timeline had been set in stone and your business had a self-destruct button set for that date. Would you have been frantically trying to figure out which wire to cut, or cruising Monte Carlo in your Ferrari? I'll say it again: you'll need twice as much time and twice as much money as you think you'll need. Can I hear an amen?

    Take "The Donald" for example. As of this writing he has filed business bankruptcy petitions four separate times. When I practiced bankruptcy law full time, I used to joke that we should give him a punch card: after four he gets the fifth one free. If even The Donald, a billionaire business mogul endorsed as an expert by no less than reality TV, doesn't get it right every time, how can we mortals expect anything more of ourselves? And note that his failures resulted in bankruptcy: the white flag, the most drastic solution. You know he threw a lot of Hail Mary passes with the full strength of his fortune and influence before those petitions were filed.

    Despite our brilliance, each of us needs time to identify our target market, design the product or service that will best appeal to them, market, tweak, pivot, and market some more. You can't come up with an idea, test it, and make adjustments in a few days — at least, not well. It takes time. Time is both the friend and enemy of business. We need time to refine all the elements that make us successful, but if we run out of time, what we planned to do next matters not.

    As entrepreneurs without a venture capital benefactor, we need to factor in the personal side too. Even couch-surfing ramen-noodle eaters need some money. The rest of us need even more. Some of us have other people like spouses, children, and older parents relying on us for support. Time is our frenemy there too. If we don't have enough time to make our business successful, we've not only let down ourselves, but we've also let down those who trust and rely on us.

    Remember, Time + Money = Runway. So now let's look at the Benjamins.

    Money

    As much as we may hate to believe it, money is the lifeblood of any enterprise. Without it the enterprise comes to a halt. Have you ever seen a hungry entrepreneur? The desperation is obvious. You can smell it a mile away. My heart goes out to that frantic business owner turning over every rock to find the magic gold coin to continue on just one more day. And yet, like a desperate girl looking for a boyfriend, no one is less likely to be offered that coin.

    When we're talking about money we need to consider both sides of your life that use money: the business and the personal. I've devoted an entire chapter to how to put together a strong decision-making process for business expenses in Chapter 4, so I'm going to devote this section to a discussion of personal expenses. But first, a story.

    There is an old Cherokee legend about a grandfather teaching his grandson about life. "There is a fight going on inside me," the wise grandfather said to his grandson. "It is a ferocious fight between two wolves. One of the wolves is evil. He wants me to be selfish, to be angry. He wants me to be proud and consider myself first. The other wolf is good. He urges me to love, to be kind, to be generous. And I'm not alone; the fight between the two wolves going on inside me is going on inside every other person too." The grandson considered his grandfather's words for a moment and asked him, "Which wolf will win?" The old Cherokee grandfather simply replied, "The one you feed."

    Likewise, there are two wolves inside every entrepreneur. On one side stands the wolf that loves to play. This wolf has worked hard for years and knows he deserves the best things in life. He has sacrificed to achieve his station in life. He is educated and experienced. All around this wolf are other wolves living in lavish caves and dining on the finest gazelle. This wolf is ever mindful of what the lesser mortals enjoy. On the other side stands a wolf that knows he must sacrifice yet again to realize a greater good. He knows that despite what he deserves, he will never get to the goal without discipline, and it doesn't matter what his comrades are doing.

    Which wolf will you feed?

    One of the constant realities of life as an entrepreneur is the tension between keeping money in the business and bringing it home. As much as we would like to pretend that the business exists in a vacuum and all the income it generates is available for marketing, staff, computers, software, services, and so on, that's not reality. The time and effort you're investing in building the business would otherwise be used to build someone else's business in the form of a J-O-B, and we know, for all their downfalls, J-O-Bs at least bring home the bacon. So must your business. The question is, how much bacon?

    You can't keep all the money in the business. Your work in the business is a service to the business, and someone — that's you — needs to be paid to do that work. Even further, a business must be healthy enough to support its founder, even in the earlier days. The last thing you want to create is a business that needs all its income to continue to exist. That's not a business, that's a charity. So if we agree that the business should be throwing off some of its income to the founder — you — how do we financially savvy entrepreneurs determine what's healthy for you and the business? When you're in the process of moving away from your startup roots to a new model of a mature business separate from you as an individual, you are going to need to err on the side of the business. Remember David: He had to fill the business's gas tank so it could grow. He had to give more to the business during the transition than it would require in the future to make that leap, to make the business efficient and profitable. In giving more to the business, David had to give less to himself. In his story, David made some pretty radical lifestyle changes. He sold his house, he sold his cars, and he gave up lobster and caviar. Now we are going to put together what those changes should look like for you. Do you need to match David's changes, engage in fewer changes, or go even further?

    Your Current Financial Health

    In this chapter and the next, we're going to help you get a firm grasp on all the numbers in your business and personal life. You're going to be able to put yourself in one of five categories:

    1. The picture of financial health. You are swimming in financial awesome sauce. You own it. You work hard both as a business owner and as a person, and you are achieving success in both your business and your life.

    2. Starting to catch the sniffles. Overall your life and business are going well, but a few nagging things must be addressed before the title of Awesome Sauce is bestowed upon you. You need a solid plan and a few pivots.

    3. Sickly. It was the best of times, it was the worst of times — it depends on the time of day you ask. You have a lot going for you and your business, but it's on financially shaky ground and that plagues you. It's time for some chicken soup and a good kick in the hiney.

    4. Gravely ill. These are uncertain times. You believe in your business, and you believe in yourself, but something's not right. You need to separate the wheat from the chaff and move in the direction of all that is positive.

    5. Gasping for breath. You are standing on a house of cards and you're waiting for it to come tumbling down. This not a fun position. You need to do some major triage and create an exit plan so you can live to fight another day.

    The category in which you find yourself will determine your marching orders. It will determine the level of change you'll need to make in your personal expenditures. Just like a sickness, the sniffles might entail a day of lying in bed watching trashy TV, whereas gasping for breath will necessitate a 911 call and a crash cart. Don't mistake one for the other. You don't want to hit a fly with a hammer; a flyswatter will do much less damage to your tabletop. But you also don't want to be caught with only a flyswatter when a bear is sitting in your kitchen.

    Remember that money buys many things, the most important of which is time. Time is your ally in the quest to create an amazing business that's of service to the world. Read a bit further how to put a solid number on your runway and how to play with that number to suit your goals.

    A note about lifestyle design: If I know entrepreneurs the way I think I do, those of you who haven't done much reading on lifestyle design are liable to hop right over this part; more power to you. I read and listen to a lot of thought leaders in that area because, despite my love of being a mother and a wife, there's a strong wanderlust/escapist streak in me that lives vicariously through the adventures of others.

    In the lifestyle design/entrepreneurial subculture there are a lot of creative ideas about getting through the start-up phase and extending your runway by baselining expenses. Some of these ideas are pretty radical. I would caution you to know yourself and really think through what's important to you as you sift through these ideas. One that's very popular among lifestyle bloggers is the idea of baselining via moving to Southeast Asia and other developing countries. This is a legitimate method of bringing your expenses as low as possible to extend your runway without actually living on a couch.

    Be cautioned, however, by one who has lived the expatriate lifestyle, that there are very real tradeoffs in moving to another country and losing your bedrock of stable friends, family, and culture, not to mention reliable Internet. Investigate the realities of living in a different country, as well as the cycle of expatriate assimilation and reentry, and remember that massive changes in the fundamentals of your life may cause an overseas move to be counterproductive to your ultimate goals no matter how cheap the living is.

    Find the Money Manager in You

    Everything we've discussed in this chapter thus far relies on the numbers. You need numbers to figure out your runway and how much time you have to make your business a success. The numbers are:

    * The actual amount of income your business generates

    * The cost to run your business (i.e., your overhead)

    * The actual amount of money it takes you to support yourself and those who rely on you

    * Any other income you may have

    The concept of the runway only works if the numbers work. If, for example, the income generated by your business is not enough to cover your business overhead, all the baselining in the world isn't going to extend your runway. You are going to have to cash-infuse your business and find another way to support yourself. How would you know that? If you're like David and most other entrepreneurs, you don't really know. You have some numbers floating around in your head, but they don't bear any resemblance to reality. You just have a vague scary feeling that you're building an unstable house of cards.

    Fixing the Gas Gauge

    I got my first car in 1986. It was a baby-blue hand-me-down 1974 Mercedes 240D nicknamed "Bluebird." It's not quite as glamorous as it sounds. The "D" in 240D stands for diesel. I had a sign in the rear window that read, "0 to 60 in 15 minutes." It got killer gas mileage and sported a double gas tank. That feature was probably fantastic when my dad drove the car in its younger years, but by the time Bluebird made its way to me, the gas gauge was broken and so was the odometer. Have you ever driven a car with a broken gas gauge and a broken odometer? It's impossible to tell how much gas you have left in the tank. It results in delusions of grandeur that leave you on the side of the road. It also leads to unnecessary panic attacks when searching for gas stations that carry diesel.

    So it is with entrepreneurs with broken financial systems. As a gas gauge tells you how much fuel is left in the tank, your financial systems tell you how healthy your business is. You must commit to fixing the gauge; it's not an option to drive your business without one. Your business deserves it. You and your mental health deserves it.

    You can't be a financially savvy entrepreneur on estimates and a chorus of "I think"s. You have to know. I am told that as a young star Madonna had a report of each day's income and expenses faxed to her wherever she was in the world. She kept a close eye on what came in and a tight reign on what went out. She asked questions. She gave orders. In contrast, a distressing percentage of multi-millionaire celebrities and athletes don't follow these practices, and those are the ones we read about on the front page of Yahoo news. As they say, you can't out-earn stupid.

    (Continues…)


    Excerpted from "The Financially Savvy Entrepreneur"
    by .
    Copyright © 2014 Emily Chase Smith.
    Excerpted by permission of Red Wheel/Weiser, LLC.
    All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
    Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

    Table of Contents

    Preface: Entrepreneurs Are a Different Animal 13

    Introduction: When the Sheriff Comes a-Knockin' 23

    Chapter 1 The Runway Equation 41

    Chapter 2 Getting the Teenager off Your Couch 71

    Chapter 3 The Numbers Game 87

    Chapter 4 What's Eating Your Lunch? 103

    Chapter 5 The Most Important Business Plan You'll Ever Draft: The Exit Plan 127

    Chapter 6 Keep the Cash a-Flowin' 139

    Chapter 7 Untangling the Money Spaghetti 155

    Chapter 8 Fun with FICO 173

    Chapter 9 Negotiation Strategy When Haggling Gives You Hives 191

    Chapter 10 Settling Debt for Pennies on the Dollar 205

    Chapter 11 When All Else Fails, Raise the White Flag 227

    Conclusion: You've Got This 241

    Notes 245

    Index 249

    About the Author 255

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