5 Expenses Small Businesses Cannot Afford to Cut

This post was originally featured on the Early Growth Financial Services Blog.

You have probably already absorbed many obvious caveats about setting up your own start-up; don’t blow money you don’t have on fancy equipment or splash out on expensive rental space. But what about expenses you’re tempted to cut, but shouldn’t? While not investing in certain areas may seem like a good idea in the short-term, not spending enough on key elements could shortchange your business, leading not only to headaches but requiring expensive fixes down the road.

Here are some areas where it pays to make the necessary investments to get it right the first time:

1. Insurance — Whether it’s a killer software or physical inventory, don’t leave yourself open to a major loss or legal claim with no protection. At a minimum, you should have liability insurance and a commercial property/business policy. The latter would include coverage for assets such as physical inventory and equipment as well as business interruption which pays off if, for example, a fire or flood left your physical location inaccessible for a period of time. Some states also impose requirements for specific types of insurance, depending on the business type. Be sure you know what is required.

2. Accounting and finance support — If you can’t find the time to do it right, when will you find the time to do it over? Paying for an accountant when you’re just starting out may seem like a luxury you can’t afford, but it will more than prove its usefulness. An accountant can help you accurately categorize and set up accounts as well as create an appropriate record-keeping system to enable you to track expenses. This will avoid a frantic hunt for receipts, hours of frustration, and potentially missed deductions or worse, penalties, come tax time.

You’ll also be able to measure your progress versus your budget and financial plan from day one. You will need this granularity not only for successfully managing your business, but also when preparing to raise funding.

Outsourcing can be an extremely cost-effective solution here. Not only will you avoid adding to overhead costs at this early stage, but you’ll save management time — and free yourself to focus on developing your business.

3. Legal expertise — Whether copyright or trademark issues, licensing, negotiating leases or choosing the correct business entity for your business, not having a lawyer involved to investigate and explain the fine print and legal ramifications could leave you facing costly litigation or blindsided by an overlooked clause in a contract.

Unless you are a trained lawyer, you are unlikely to have the appropriate level of specialized knowledge on all the issues you will need to address. At a minimum, you should engage a lawyer to draft and/or review every contract you enter into.

4. Marketing — While these days it might seem that there are plenty of “free” ways to grow your business, how will you attract customers and appropriately target your product(s) to the desired client segment, without budgeting for it? This does not mean you need to spend money you don’t have hiring an ad agency or launching an expensive PR campaign. It does mean developing a smart and discrete spending strategy tailored around the best avenues to reach your clients.

For example, if your target market is end consumers, look for guerilla marketing opportunities like sponsoring an event or a slower building viral campaign using YouTube. Analyze your desired segment and see which forms of social media might reach them: maybe it’s sustained Twitter and Facebook campaigns. If you already have a list of targeted customers, don’t overlook email marketing. While fairly low cost, depending on your product it could be a highly effective way to reach prospects.

Lastly, hiring experienced marketing professionals on a contract basis, say to help with building initial brand awareness and/or to create a campaign for Phase A of your product launch, will help keep costs reasonable.

5. Sales — Your sales strategy is a critical element of your business plan and you need to put spending behind it. Do not assume that the software engineer you hired can also double as your business development specialist. While infusing a sales culture throughout the business is non negotiable, it can’t take the place of an experienced sales person/team dedicated to all aspects of growing sales from generating leads, to prospecting, to closing the deal. This person or persons should be closely allied with the marketing effort. You can keep costs low at this stage by making compensation commission-based.

David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best.

 

Data on Minority & Women Business Capital Access Challenges

A new report published by members of the Small Business Financial Health Initiative (SBFHI) has zeroed in on some of the roadblocks that minorities and women face when they are looking to secure financing for their companies.

They have a much more challenging time accessing debt capital than their male and non-minority peers. Only 28% of female-owned businesses and 21% of minority-owned businesses in the study achieved the above-average or excellent designations in the report, which means the majority of female and minority-owned businesses were either in the poor or below-average financial health categories. This is a problem because the study also revealed that not one single business in the poor or below-average financial health ranges secured financing from a bank lender, compared to 38% and 75% of businesses in the above-average and excellent financial health segments, respectively.

This report affirms the disparities in credit experience for women and minorities documented in much of the existing literature/research on this topic. In a 2012 article on Forbes.com, Timothy Bates, a distinguished professor of economics emeritus at Wayne State University and Alicia Robb, senior research fellow with the Ewing Marion Kauffman Foundation, describe how minority-owned businesses typically encountered higher borrowing costs, received smaller loans and saw their loan applications rejected more often.

This does not mean all women and minority-owned small businesses are shut out of lending, it just means that those who do secure financing are more likely to be financially healthy. One example from the study is an aesthetician from Illinois who said: “I have a line of credit with (National Bank) and a business credit card with (National Bank). Vendors offer a line of credit. I’ve been in a financial crisis in the past, learned from it [and] I never want it to happen again.”

In general, financially healthy companies had owners with good personal credit score, plenty of unused credit on business credit cards, and a track record with some external financing, whether with a traditional bank loan or funds from another source like a Community Development Financial Institution (CDFI).

Another critical issue facing women and minority small business owners in the mainstream credit marketplace is discrimination. In June, The Washington Post cited new academic research revealing that minority entrepreneurs were treated worse than their white counterparts when seeking financing for a small business, even when all other variables were identical.

Women may soon get some relief thanks to a new bill introduced by U.S. Sen. Maria Cantwell, (D-Wash), chairwoman of the Senate Committee on Small Business and Entrepreneurship. She and several other senators want to provide female entrepreneurs with better and more equal treatment in starting and growing a business. While women own 10.6 million businesses in the United States, they still find it harder to secure business loans than men do, according to Small Business Trends. In fact, a Senate report found that only $1 out of every $23 lent to small businesses goes to a woman-owned business.

While such efforts by Sen. Cantwell and others won’t solve all the problems facing women and minority-owned businesses, they will at least spark a conversation about the unique credit access challenges women and minority small business owners face.

It is important to note that regardless of financial health status or ownership profile, many respondents lacked growth capital. The report suggests that further study is needed to discover ways to increase the affordability and availability of growth capital products.

“Opportunity Cost” Sounds Strange But It Costs Your Business Money

You may not recognize it, but opportunity cost affects your business every single day. Opportunity cost is essentially what you give up (the benefits of the next best alternative) when you make a choice. To understand how to keep your opportunity costs low, let’s first meet John.

John is a new client. You and John spent about an hour back-and-forth discussing his exact needs as a client and then figuring out a date that works for both of your schedules to fill said needs. Fast forward to today – you’ve got John’s job on your calendar this afternoon. You start heading over to John’s house. Suddenly you get a call. John has to cancel last minute and he’s not sure about rescheduling. He’ll “get back to you.”

Immediately, you get a pit in your stomach. That feeling is not simply about losing out on a piece of business. It’s about the time you spent planning the job, the afternoon you blocked off for the job, and all the other clients you turned down in preparation for the job.

If only you had known that John wasn’t a reliable client, you wouldn’t have invested all that time with him. You would have gone with another client – another choice. Unfortunately, no one can know these things beforehand, especially when it comes to new clients. You can, however, protect yourself with 3 simple steps in order to reduce your ultimate opportunity costs.

1. Institute a fair cancellation policy

You know your time is money, but most clients don’t understand this. Communicate to your clients a fair cancellation policy. Your customers need to know that your time is serious, and instituting a cancellation policy gets this message across. John would’ve thought twice to cancel on you if he knew there was an actual cost for him to bear in doing so.

2. Reserve your client’s payment information ahead of time

You need to enforce your cancelation policy, and you need your client’s payment information to do so. However, it can be a big “ask” for your clients to blindly hand over their credit card to a brand new business. Increase your client’s comfort level by using a trusted third party when collecting their payment details. That way, your client is happy to hand over their payment information and you both can sleep well at night.

3. Stop invoicing

Invoicing leaves you vulnerable to late payments. Clients just get lazy when it comes to paying bills – no one enjoys writing checks, so it’s easy to push it off. And worst case, clients can totally forget about paying altogether! Every dollar in your pocket can be used to reinvest in your business, so the sooner you have that hard-earned cash, the better. Keep customer payment information on file to eliminate the need for invoicing altogether and guarantee timely payment. For unreliable customers like John, you of course want to make sure they pay when they cancel, but more importantly make sure they pay when the job is complete.

 

When is it time to hire a CFO?

This article was authored by Sirk Roh and initially posted on the Early Growth Financial Services blog site.

Early stage and small companies need CFOs with a different mindset and skills than their peers’ in large organizations. Of course, early stage CFOs can and do manage P&L and handle investor relations, but they also do a lot more. How do you know when it’s time to bring one on? And more importantly, what exactly does a startup CFO do?

Startup CFOs help to hone a startup’s business model and drive growth. They must simultaneously have a handle on the company’s cash position: answering questions like “are we spending in the right place?” and “how much cash/runway does the business have?”

In addition to:

  • Managing P&L
  • Modeling cash flows
  • Tracking financial performance versus plan
  • Helping drive discussions with 409A valuation firms (these should be done at least once a year and/or after any substantial change in a company’s valuation.)
  • Supporting equity and debt negotiations

At the same time that startup CFOs are focused on cash, they need to be strategic business partners: using sound financial metrics and guidelines as tools to provide counsel and guidance that enables CEOs to make business planning decisions around, “what’s the right time to hire?” and “how should we go about acquiring customers?” This allows CEOs to keep their focus on product development and customer acquisitions. In short, startup CFOs wear multiple hats.

When you’re looking for a startup CFO, choose candidates with broad experience working with early stage companies, who can address those additional areas of focus.

When is it time to hire a startup CFO?

  • Look for a CFO once you have institutional investors and/or you’ve raised more than $500,000. Investors expect to see correct, accurate, and dependable financial statements. That means GAAP, accrual based, statements.
  • Once your business has started generating real revenue, it’s time to hire a CFO to make sure that your reporting is dealt with properly. Accounting rules concerning revenue recognition are not only highly specific, often requiring analysis, they are also changing.
  • Your business’ complexity, financial activity, or expenses have increased.
  • When you’ve reached a pain point.

So now you know when you need one, how should you go about finding a CFO for your startup?

Think through which services you need: whether it be annual valuations (if you give employees stock options), day-to-day bookkeeping, month-to-month reporting, or regular tax preparation, and then consider your hiring options:

  • Hire experts for each service, making sure you weigh value versus cost. The key is to bring in experts at a reasonable cost.
  • Hire a full-time or part-time CFO.
  • Bring on an outsourced CFO. Outsourcing frees up your time to focus on other aspects of running your business.

Even if you’re not ready (or can’t yet afford) to take any of the above steps, there are practical things you can do now to make the eventual transition to professional management easier.

  • Track all your spending so that you stay on top of your cash burn.
  • Don’t commingle business and personal accounts (this can make tax preparation a nightmare and is a red flag for auditors).
  • Set up a simple accounting system that can grow with you—QuickBooks and Xero are both good software solutions.
  • Find a firm to help you with your day-to-day transactional accounting and bookkeeping.

Do you have questions? Let us know in the comments section below or contact Early Growth Financial Services for a free 30 minute financial consultation. 

For assistance with financing your small business, fill out your FundWell Lender Matching App.

Sirk Roh is COO for Early Growth Financial Services. He’s an accomplished finance executive focused on leading early-stage companies through strategic financial decisions. Sirk’s areas of expertise include debt and equity financings, planning/budgeting, financial analysis, cash flow management, high growth management, and cost reductions/rightsizing. Connect with Sirk at contact@earlygrowthfinancialservices.com.

9 Tips for Achieving Your Startup Business Goals

Originally published in StartupNation.

How do you make 100% sure that you achieve the goals you’ve set for your business?

1. Set Smaller Goals!

It’s critical that you set reasonable goals/expectations for your business in order to achieve them. Many entrepreneurs have visions of grandeur and set unrealistic goals based on these delusions. Set reasonable goals based on existing data that can be achieved over a short period of time. It’s far more satisfying consistently hitting smaller goals, than missing badly on unrealistic ones.
— Anthony Saladino, Kitchen Cabinet Kings

2. Put It On the Wall

If you don’t measure it, it doesn’t matter. We try to put our goals up on the wall and make sure all the instruments are in place to track our progress. At the end of the day, we know if we are succeeding or if we need to pick up our effort. There is never ambiguity about success.
— Adam Lieb, Duxter

3. Establish Clear, Shared Objectives

You need to have objectives defined very clearly WITH the people that are going to have to deliver on those goals. Empowerment in the earliest stage of the goals definition allows your team to own the goals and to achieve them more often. Also, regular milestone and meeting dates to follow progress are essential.
— Guillaume Gauthereau, TOTSY

4. Stay Accountable, All the Way to the Top

Years ago when we were in startup mode, we didn’t even set goals because they felt arbitrary and silly if we were all hustling 110%. Now, we realize the power of setting goals, writing them down, and making yourself accountable to them by sharing with your team. In fact, the most powerful (and often hardest to reach) goals are the ones that we have people set for themselves and share.
— Michael Mothner, Wpromote

5. Be Flexible—and Execute

In reality, I don’t think it’s possible to achieve 100% of your goals. But, if you set aggressive goals, have a strong plan for achieving those goals, and concentrate on execution, you’ll be well-positioned to achieve most of them. Most important to goal execution? Flexibility. Track your goals and progress and be open to changing your plans and modifying your goals to hit moving targets.
— David Ehrenberg, Early Growth Financial Services

6. Delegate, Delegate, Delegate

Divide the goals and assign each part to the person most capable of making it happen. Check in regularly, but do not micromanage. Set reasonable deadlines, ask questions and confirm that everyone is on board with their task. The key to successful delegation is equal parts trust and distributing responsibilities smartly.
— Justin Beck, PerBlue

7. Keep Your Eye on the Prize

Once you set your goals and begin on your path to achieving those goals it is easy to lose sight of them. During your day-to-day operations, your priorities may change and you’ll often find yourself on a different path. It’s imperative that you set a clear road map to achieving the overall goal with smaller, micro-goals along the way. By accomplishing each micro-goal, you’ll capture the prize.
— Kevin Tighe II, Techertainment, Inc

8. Write a Punishment Check

For the most important goals that I want to make sure I accomplish, instead of rewarding myself if I accomplish them, I work better when I am punished. Sometimes, I do it where it hurts the most: my wallet. I will write a check for a certain amount and give it to someone who can keep me accountable—and will actually cash it if I don’t accomplish it by the post-dated check.
— Peter Nguyen, Literati Institute

9. Do Not Sleep

Metaphorically speaking, of course! But seriously, do not go to sleep on your competitors. Do not go to sleep on the needs of your employees. Do not go to sleep on showing value to your clients, your users, or the Street. Do not go to sleep on marketing yourself. And yeah, it also helps to barely sleep because someone, somewhere, sometime is always trying to work harder than you.

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