If not taking the right steps, start-up businesses can quickly lose stability, leaving new owners making the tough decision to remain open or close their doors.
Significant changes have been hitting the business landscape hard recently, especially during COVID-19. This means start-ups can meet a dead-end for a variety of reasons if they don’t have the right business plan or financial model.
Is it because many entrepreneurs are poor planners or that they underestimate the viability of their new ventures?
In many cases, says Michael Majeed, an executive and consultant based in Toronto, some entrepreneurs don’t have a good handle on how business finances work.
Michael Majeed, an accountant by background who works as a senior financial consultant and regional sales manager at a leading SR&ED tax credit firm in Markham, Ontario, says there are certain responsibilities businesses owners need to take upon themselves if their companies are going to be viable in the long term.
“First,” Majeed says, “in the majority of cases it takes two to three years for a new business to start showing a profit. That doesn’t necessarily mean that you are doing something wrong, and it doesn’t have to mean that you won’t get paid. As an entrepreneur, you may be able to take an income from your start-up even when it’s showing a loss on paper.”
In fact, he says, investors can also profit at a fixed interest rate, regardless of how the company is doing. “The actual time frame of profitability depends on how much start up capital is needed at the onset and how much is drawn for compensation.”
The point, according to Michael Majeed, is that financial knowledge is crucial to the success of any business.
He offers these five bits of advice for anyone who is new to the entrepreneurial landscape.
Always know your numbers and check on them frequently.
From the time you launch your company through the time when the business is up and running, and even as it matures, it’s important that you tightly manage its financial performance. Majeed says, “This includes creating a budgeting process and reviewing the business plan regularly for performance. Precise planning makes a difference in that it allows the entrepreneur to improve profits, reduce costs and increase the return on your investments.”
Watch your balance sheets for any problems.
“There’s an old adage — numbers don’t lie,” says Majeed. “Numbers can indicate profitability, but they can also show the first signs of financial trouble.” So what are some things a business owner should be looking out for? “For starters,” says Michael Majeed, “rising debt-to-equity ratio. This indicates that the company is incurring more debt than it can handle.” Following that, he says you’ll want to recognize unsteady cash flow. While cash flow is a good sign a rule of thumb is that it should be a flow, back and forth, up and down. Additionally, a declining profit margin is cause for alarm.” Majeed says the profit margin must account not only for the costs to produce the product or service, but the additional money needed to cover operating expenses, such as costs of debt.
Know how to project profits and losses.
Everyone launches a new company with the intention of making money. To accomplish this, it’s pretty evident that the money coming in needs to be greater than the money going out. A smart CEO or owner, says Majeed, will be savvy at projecting profits and losses.
“As an entrepreneur, you need to start with expenses, not revenues,” says Majeed. “Forecasting business revenue and expenses during the startup stage with a degree of accuracy takes a lot of time. And more important, investors won’t put money into your business if you don’t provide them with a financial forecast. This is important, as it will help you develop operational plans that will ultimately help make your business a success.”
Align yourself with smart financial professionals.
It’s imperative for all business owners to surround themselves with people whose skills complement their own, and when it comes to finance, a field in which the laws, rules and regulations are always prone to changing, you really need to have access to expert counsel.
“Most people who start companies know the industry they’re in, but don’t have the financial knowledge to be able to understand and respond to the many nuances that are likely to present themselves,” he says.
Whether you have a staff accountant, controller or both, or decide to retain out-of-house professionals, Majeed says it will only benefit you in the long run.
Be prepared for taxes.
Taxes are a reality in the business world, and corporate or small business taxes are vastly different from personal ones. There are many deductions that you’ll be able to take, and many expenses you can use as write-offs, but as with the previous point, Majeed says you’ll want to make sure you’re getting solid advice from a professional — or even a team — who can help you maximize your deductions and your profitability.
