Thinking Financially as an Entrepreneur?
So you want to start a business? Struggling to figure out the what to do and how to do it. Well I am afraid I cannot tell you the best business to start, for you, but I can say how I would approach setting up a simple business with a view to ensuring your finance house is in good order and some tips on cashlow in the initial start up.
Finance and how you think of Finance is quite a skill. There are many professionais out there in the world that have spent years or decades training this skill. I am one of them as a Professional Accountant, a member of Chartered Institute of Management Accountants. I continued my Higher Education at Warwick Business School. Personal learning should be a constant activity.
Over the last 40 years I developed my career in Finance and Management in large multinationals and my own businesses. I achieved my first Senior Business Team Role at 32 years old. From that time I have spent my career building Teams, developing people, developing my own leadership skills as well as technical competetncy at home and overseas. Developing seven year Strategic Plans, operating in different countries, setting up my own Consultancy/Freelancer business and finally securing for myself the Corporate Job Titles I seeked, travelling the world with the €180k per annum salaries I dreamt of.
Today, I re-enter the entrepreneurial space. In a pure digital world where the basic economic model of equilibrium of supply and demand does not appear to work. Supply is infinite, for digital products. We need a new model. But first, what did I think about prior to this decision? The market you are about to enter is irrelevant.
My thoughts – Was it all worth it? All the work, learning and sacrifice. Did I make mistakes? Yes of course I did. Would I do it all again? That is a very good question. I would say yes and no. Does this self doubt, self talk sound familiar?
What I can say is the ability to learn, to develop understanding of behaviour in complex environments, a thoughtful approach to problem solving and getting it right first time are an invaluable skill set. Talking of getting it right, lets get into the struggle of entreprenuerial thinking on the theme of Finance.
Everything “Funnels” into Finance!
Thinking Financially
Perhaps he business you dream of starting is a cosmetic online shop, or a business to business software solutions or Tech StartUp, a FinTech business or a Physical Gym with online capability for coaching. There is a never ending combination of types of business in the new digital era.
Each is very different, each needs Financial consideration and cash to fund growth. That’s right, you already have a first step to consider, Finance and Cash are two separate considerations.
Starting a new venture can be a daunting prospect. You can watch You Tube to learn some bits of information but most of what I have seen seems to focus on imposter syndrome, get rich quick with do this to make $10k/month, side hustles to earn extra cash whilst working a full time job.
To succeed as an entrepreneure you need to set yourself up for success with a long term, sustainable business model. Agile and adaptable to the environment. A clear Vision on your differentiation of your business Product or Service, the Stand Out in the Crowd factor.
After spending months researching your intended market space, your product you will build, you have considered how to enter the market, how to develop a sales pipeline, potential pivots you can see today even before starting you can see options. You feel comfortable leading as a CEO so you have a resource plan. These are all good steps in your thought process.
You are set. You are ready. So let`s do this!
The Entrepreneurial Doer.
You might need a space to operate from, just purchased some fashionable suits or outfits, got the latest mobile phone model, MacPro or Laptops. Subscriptions are adding up for your online requirements. You purchased some stock or equipment for your operation.
You are making some sales now. Perhaps not enough. Some customers are not paying. The business is in overdraft or in debt from the start up costs or just day to day operations. Interest rates are increasingly costing you more, struggling to make payroll.
Suddenly a year has past. Its been tough. You survived.
Then, you need to pay some tax, or someone has mentioned to you that you have breached the sales revenues threshold and should be VAT registered (€22k in Germany). Oh no, yet more cash needed. But I made a profit!
Now your focus is needed on your business admin. You are overwhelmed. Growth has slowed because you cannot focus on that key lever everyone is saying is the most important thing to do as an entrepreneur.
How will I ever fit all this into a 4 hour work day?
The 4 hour work day versus the seemingly workaholic lifestyles of the CEO Entrepreneur Billionaires, that I find personally fascinating to watch the debates and discussions of Cal Newport, Dan Koe, Hormozis and others as people are drawn into the Productivity world of what it takes to succeed. Finally the word Productivity seems unimportant, an impossibility to you.
You have no time. You have no cash. But the idea could have worked. You are a doer, you took action.
Reality sinks in.
The Other Type of Entrepreneur – The Procrastinator
The opposite to a Doer is the Procrastinator. Let us assume you have the same business model as the Doer. You have not started yet and you are stuck watching self help on procrastination and motivation. You are not sure how much cash you need. The profit margins might be predictably high but do you know what it will cost you in cash? Can you affod to fail at your Sales pipeline?
You have learned to build a website, but have no plan yet. You may already be fully employed so this is just a side hustle. You make very slow progress. Sales start to materialise from your online activity. You purchase the stock and laptops. You quit the job, or delay the decision as you start to finance your side hustle from private funds.
As a Procrastinator, you are not comfortable with fast decision making. Time passes. It may have taken much longer but now you are in the same place, roughly. Perhaps opportunities were missed because you procrastinated. But you got there because the pressure forced you into action in the end.
The 4 hour work day never materialises. Then someone mentions you need to register your business. Potentially pay some tax as you breached some threshold in your location in the world. Now you have to focus an your business admin and not the levers for growth.
You are overwhelmed.
The Common Problem
The message is clear. It does not matter the type of person you are. You may have the same business model. Unless you take the right steps you end up in the same place. The opportunity to maximise cash for your business has been lost and replaced with a stressful recovery of your administration for at least a year.
Bringing the business to life and the subsequent cash flows to keep it alive is a great place to start to avoid this and gain cashflow improvements.
To avoid the large potholes later down the road you need to start thinking like an entreprenuer. Understanding Finance is a key piece of that entrepreneurial thinking. The cash is owned by the business, legally, in most places around the world. The business has its own identity, legally.
Side hustles, digital online affiliate marketing, online courses are all no different to physical businesses, as in stock of product or in person services like a gym. The intention is to generate income or why do it in the first place.
So, what are the first steps I have taken and what have been the benefits? I deliberately focus on a thoughtful approach rather than explicit financial guidance. There are just too many variables by local conditions and regulations.
Forming The Company and Gaining Positive Cashflow
One of the first steps to take, and often not considered in any depth, is the company formation. The type of company to register whether it is a solo business traded in your own name or with a company name, a partnership. Or limited liability. Each has its pros and cons, different set up and running costs.
Most entrepreneurs start as a solo business. They initially lack cash or the backing of financial investors to be able to set up a limited company. The onset of the digital economy has seen a rise in the number of solo online businesses, attracted by the potential of high margins.
Below I outline my steps to set up of my own solo business.
Think of this as giving birth to your business. I remember some three decades ago discussing the concept of legal aspects of a business. The legal systems very much views a business as a living entity. A business can also die.
By registering your solo busniess in your own country you can immediately begin to gain some benefits. Usually a registration number is provided. This registration number is required by a Bank, to prove the legal existence of the business. You then have a separate (as in NOT your personal bank account) bank account which you can receive revenues into.
You can also invest into your business from personal funds, seperating out your personal life from the business. A huge benefit to avoiding those potholes later down the road.
During the registration process the business is provided Tax Numbers. These are required for sales invoicing, subject to local regulation. Using the words in English this is Value Added tax (VAT) just to keep things simple. This means anything you purchase that has VAT included may be claimed back from the ltax system. A major advantage for your cashflow.
Where do I Start?
Well you cannot start building a decades long skill stack in Finance but you can start to think in a Financial way. The best ideas will fail if the Financial Foundations are weak. Build a sustainable business.
If you wait to start until you have all the skills you feel you might need, you will never start. However, you can start working on multiple workstreams, including skill acquisition, right from the beginning. No I do not mean Multi-tasking. I mean start by writing a list of Projects or workstrems to be worked on. The following List is what I did Prior to even launching my website:
- Learning and Research – the figuring it out bit. The sexy bit for you, but everyone else thinks you are turning into a couch potatoe, watching YouTube!
- Establishing What I would like to do and the possibility based on who I am and my skills, knowledge and my perception of the market
- Gap Analysis – what I need to learn more of before I start
- Training the technology. Focus in on the technology that is a must know for success. Immerse yourself in the learning.
- Strategy, Operational and Tactical thinking. We touch on this next in this article.
- Initial Finance and Cash Planning
- Business Administration, Registrations, Domain Purchase, Logo
- Operationalise by bringing the previous steps to a close and build my website and start producing content
The fact you are working through the list means you are beginning to acquire a number of new skills. Reading promotes thinking, reflection, learning. Reading on and completing this informational, for instance, will begin to provide a framework to approach Entrepreneurship.
When you start something new, it is only new in those brief first few seconds. Then, it is not new any more. Get to the end of this short informational and guess what, you have started.
Learning The Difference Between Types of Thinking Will Improve Your Focus
Strategy is used ad lib on You Tube and in Many Blogs. I have watched and heard “I think Strategically every day about my business. My daily Strategy is…., you can approach each day Strategically“ so many times that I cringe every time I hear the word Strategy. It is just such a sexy, attractive, elusive word that people love to use but I find rarely understand and distinguish it´s use and application.
The digital economy speaks to me as though the individuals are constantly looking at the future every second. And evaluating what they do in the moment against that potential future. In my mind it´s adding complecity into every minute of your thoughts.
It`s adding decision making into a build process or a daily task and relating what you are working on in the moment and asking is this strategically relevant to the success of my new business venture.
This takes away Focus. It means asking if what I do now is right and going through some crazy loop of evaluating every step yiou are taking, a validation of every keystroke. This will slow you down bíg time. One needs a way to think about the workstreams or Projects so that you have a clear structure of the What, How and When.
Strategic Thinking
Perhaps an easy way to think of Strategy is building a road from point A to point B with obviously point B being wher you want to get to. When you get to Point B what does it look like? Does it take 1 year or 5 years to get there?
In the steps above the first two points are Strategical. Research and learning, identifying the opportunities and establishing your long term goals. Narrowing down your options. Focusing in on what the possible might look like for you.
This may take six months. It took me eleven months. It may take you a few weeks. The more time invested in understanding the opportunities and the market palce the more likely success will be generated from the efforts.
You should consider the value and creation of your Sales pipeline here as well.
I have built 7 year Business Plans for review by investors, for long existing businesses. This is also strategice but does not apply for a start up situation. I will cover other aspects on Strategic Modelling and all the nuances in later articles.
Operational Thinking
Performing a GAP Analysis between what you need to know and what you do know. Identify the tasks you need to perform and learn before you dive headfirst into any new venture. This sounds counter intuitive right?
Well you know what the goal is, you have finished your strategic thinking. Feasibility is a key word right now. The speed of diving headfirst into any new venture without an understanding of the “Operational Activities” in the coming months would increase risk of failing.
Imagine you want to set up educational courses. You do not know how to but it is a good idea. But you need to pay €5,000 for a course. It is a lot of money and if you have already launched a website and then find out later you have to pay this but do not have it unless you borrow money (well the business borrows it if you have formed the company) will add further pressure and risk of failure.
So a learning plan is needed…what is necessary rather than a nice to have. How far can I get without spending money? There is a huge quantity of top value free courses.
Really thinking about the mechanics of what is needed and how to finance those activities. An initial purchase of computer equipment can see 20% of that cost come back into the business as a positive cash flow if you have set up and formed the business legally.
Success is achieved when all workstreams are pulled together as you launch the business, ready for growth.
Tactical Thinking
The doing on a daily basis. Every day your thinking on the daily task is key. This is where you draw down from your Operational Thinking or Plan if you wrote it out. The steps necessary to move the business forwards on a daily basis.
Doing the learning, opening up bank accounts, registering the business, organising outsourced legal and financial help, daily cash planning, setting up the website,, signing up subscriptions, spending money that yoou planned on spending.
At no point are you thinking of strategy. You have taken the decision. Done your homework. You are taking action by doing.
At some point you will ask yourself “am I on track”? this would be when one revisits Strategy and Operational Goals and reviews what further action is necessary. But that is a whole different article for you to read.
Conclusion – Congratulations You Have Started!
The launch day arrives and you are excited. Its been 3 months since you purchased the computer equipment, or Gym equipment or stock. THE VAT you paid on it is back in your business bank account. Your sales invoices with VAT numbers are set up as pro-forma ready for your first sales.
Now the pre-orders start to materialise along with new sales. Your pipeline focus is of paramount importance. Ypur business is moving forwards with no distractions and you thinking is focused on the three focal points of success and the activities needed to move forwards.
An introduction to the concepts of finance in relation to starting up a business to optimise for initial success. Breaking down your thoughts provides a focused structure to provide an approach to entrepreneurship.
You have read about listing out your workstreams or projects. You have acquired a basic understanding of the often used word of Strategy with its elusive definition. You have an idea of two other terms used extensivley in business that you may never heard of before and can appreciate the nuanced differences.
The jpurney has started and you should avoid those potholes that always hit businesses when they least need the problem. The essence of financial Planning.
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