For most entrepreneurs, building a company starts with a novel idea. Maybe it’s a disruptive technology, or perhaps bringing better service to an industry that needs it. Whatever it may be, few things are as thrilling as taking an inspired and well-crafted idea, and making a business out of it.
While an entrepreneur might have an idea that is truly revolutionary, they also need to have an acute awareness of one simple truth: when it comes to business, it’s numbers that matter most.
Not paying attention to the right numbers (and not tracking them, not learning from them, not optimizing them) will doom even the most disruptive business concept.
But there’s no need to despair. Even the most creative or abstract thinkers have the capacity to fall in love with numbers. Focusing on the following metrics will help.
Related: Why Payroll Matters to Your Startup
Cash flow: The entrepreneur’s lifeblood and measuring stick
At first, building a business is all about creativity. The drive to innovate, refine and perfect a concept is what gets an entrepreneur out of bed every morning and gives a business the spark of life. While creative drive might sustain a business for some time, at a certain point, it’s not enough to keep it alive. Cash flow, however, will.
If you’re the captain of the ship, you need to follow the map. Thus, it’s important for entrepreneurs to make financial projections over and over again to understand how money is flowing in and out of the business.
Personally, I’d love to see accelerator programs ask to see a handful of financial projections entrepreneurs have developed over time. It’s proof they’re committed to making their business successful. It would also be great for accelerators to not only offer workshops on financial projections, but on accountability. Companies should have to formally present data points on why they’ve missed payroll, etc.
Angel investors will hold entrepreneurs accountable, too. They’ll quickly notice when their investment has gone down the drain. Entrepreneurs tend to communicate with their investors often, so it’s usually pretty apparent when there’s been a drastic change regarding the company’s cash flow.
So what should an entrepreneur do when they end the quarter in red? The first and most important thing is that they do not lock themselves in a room to handle the situation solo. Rather, entrepreneurs should maintain communication with their investors. It’s not uncommon for an entrepreneur to miss the mark on numbers. But it’s important that they are comfortable asking their investors for help; there may be a door that can open.
The point is, entrepreneurs need to be accountable for their financial results.
To create a profitable and scalable business, an entrepreneur has to understand why or why they’re not hitting projections.
And no less important, they have to be accountable for their results.
Payroll: Why it helps to plan, and how to troubleshoot when you don’t
When a company misses payroll, it’s proof they haven’t thought their plan out well enough. But in my experience, about 90 percent of entrepreneurs eventually do. It’s not only extremely important for entrepreneurs to understand how liable they need to be for payroll, but also, what to do if it’s missed.
In the unfortunate scenario that this happens, a CEO needs to know how to raise funds, and fast. It’s not impossible to raise capital before the next payroll (there’s angels, banks or friends), but it’s expensive money. It’s always better to raise funding in a financially stable position.
Entrepreneurs also need to know how to manage staff when payroll is missed. The key is to be as transparent as possible. When an employee has heard the company has misfired on the plan, a CEO might be able to count on some of the best talent to stick around and be patient; these are the people who believe in the idea. But not everyone will be that way. Some people will walk.
All in all, it’s not a great position to be in. Rather, it’s always better to ask for support from investors or mentors before the situation gets out of hand. While entrepreneurs scrounge together resources just to be able to pay employees, competitors can get a leg up on making moves to take over the market.
Funding: Hiring the right team does make a big impact on the bottom line
Let’s say an entrepreneur has a sound idea and is capable of running with it. He or she secures $200,000 on their first round of fundraising, and now they’re ready to build. But if the entrepreneur makes a bad hire and is suddenly behind the eight ball when it comes to development, the consequences can be near impossible to recover from. It’s $200,000 down the drain.
This is why, especially for first-time entrepreneurs, it never hurts to consult help when hiring. That is, someone to make sure one is hiring for competence and that the people brought on are excited about the business.
For example, one of our portfolio companies asked for our help with hiring. They were very close to making an offer to a candidate that we thought would have been a poor fit for the company. We advised the founder not to hire a candidate they liked. So yes: sometimes it helps to have an experienced hand guiding crucial business decisions.
Entrepreneurs who have an unwillingness to understand and articulate the financial health of a company are simply, doomed. But numbers don’t have to be boring, either. By hiring the right people and mastering the basics, including cash flow and payroll, entrepreneurs will learn to love the numbers behind their business as much as they love their idea.