My name is Mark Goodfield and I am a tax partner and the managing partner of Cunningham LLP in Toronto. This blog is about income tax, business, the psychology of money and investing topics and is meant for taxpayers no matter their income bracket, but in particular for high net worth individuals and entrepreneurs who own private corporations. I also blog about whatever else crosses my mind; I have to entertain myself. This is my personal blog and the views and opinions expressed in this blog do not reflect the position of Cunningham LLP. I am blunt and opinionated (at least for a Chartered Professional Accountant). You've been warned.

The blogs posted on The Blunt Bean Counter provide information of a general nature and should not be considered specific advice, as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, October 24, 2011

Advice for Entrepreneurs

In one of my blogs, I said that I have developed a sixth sense in “sifting out,” among the people I meet, those which will most likely be successful. Based on this comment, one of my readers suggested that I write a blog on the “distilled” advice I would provide to an entrepreneur starting a business. I really liked his/her suggestion and thus this blog was born. My comments, based on 25 years of observation are discussed below.

Personal Relationships


In my opinion, the most important issue facing any entrepreneur involved in a relationship or married, is their significant other. Starting a business requires a significant time commitment and comes with a large element of risk. If your significant other is not willing to support you both financially and spiritually, either your business or marriage/relationship is doomed. Where there is resistance to starting the venture, or the other person does not have the same risk threshold, they seem to just drain the enthusiasm and energy from the entrepreneur. Thus, in my opinion, if there is not buy in from your significant other, your chance for success is diminished before you start.

Be Honest With Yourself


The first thing you must ask yourself before you commence any business is; are you an entrepreneur by choice or circumstance? If it is by choice, move to the next paragraph. If your reason is circumstance, such as being laid off due to a recession, you must realize that unless you are starting a service industry or similar industry where you have portability of your clients or customers (i.e.: you start your own law practice and when the economy picks up, if you are hired by law firm, you can take your clients with you to the new firm), this will potentially be a lifelong commitment. If you cannot make a long-term commitment, do not start your business, as it will most likely be doomed to fail.

Business plans and cash flow statements


My first suggestion is to walk before you run. Make sure you start slowly and have everything you require in place. To ensure you have everything in place, you need a business plan and cash flow statement.

Developing a business plan forces you to consider all aspects of your new businesses from production to the marketing and professional fees you will incur. A business plan acts as an initial road map, and although it will change, it provides initial direction.

In almost all cases, the banks will require a business plan and statement of cash flow. For any new business, the revenue line is an educated guess at best, however, the expenses and cash outlays are fairly predictable and as such, you will have some cost certainty. Once you know your costs, you know the minimum amount of revenue you will require to pay off your creditors and lenders.

Partners and employees-Know Your Abilities


Most people are either sales oriented or business oriented. If you are strong in both aspects you have the best of both worlds. Whether you start with a partner or hire an employee later, know your strength. If you are a sales person hire a good bookkeeper or accountant to help you. If you are the business person, hire a good marketing person or get advice on how to market your product or service.

Type of business


If you are developing computer software or apps, you are entering an industry with few barriers to entry and your costs may be limited to the utilities in your basement. However, if you intend to start a service or manufacturing business you may have serious barriers to entry and financing issues.

Financing


Whether you are starting a services business or manufacturing business, you will likely require financing. Although you may be able to access some small business loans (research which loans are available to start-up businesses), financing is often problematic for a start-up business and, even when you can obtain financing, you will almost always require some personal capital. Thus, where possible, you should try to start your business after you have worked a few years and built some capital. If you are lucky enough to attract venture capital, the VC's will want to see that you have significant "skin" in the game. Many young entrepreneurs access family money, either as loans or as equity. However, since many start-up businesses fail, you should ensure that if you borrow or capitalize your business with money from your parents, you do not put their retirement plans in jeopardy.

Where possible, have a line of credit or capital cushion arranged in advance.

Marketing



If you cannot afford to hire a marketing consultant to ensure that you have a market for your product or service, then utilize the internet for research and, more importantly, talk to people in the industry. Although some people may view you as the competition and avoid speaking to you, others benefited from a mentor when they started and may be willing to speak to you and, if you are lucky, they may be willing to provide some mentorship along the way. Either way, get out there and pound the pavement and speak to people.

Don’t discount your services or product


One of the biggest mistakes I have seen entrepreneurs make is discounting their services or products to get business. The problem with this is that your customers will refer you to their friends as a cheap provider and you will get referred customers who are only looking for discounted services. This cycle is very hard to break. Sell for a fair price, but don’t become known as the person with the “cheap prices” unless you can truly make money in that manner.

Keep Your Books Yourself


This is a bit of an unusual suggestion, but if possible you should initially keep your own books and learn about accounting. You may require a bookkeeper to assist you, but you will always be a better decision maker if you understand your own books. You do not want to be dependent on your bookkeeper.


Watch Your Accounts Receivable


It is imperative that you get in the habit of collecting your accounts receivable on a timely basis. This is important for both cash flow and establishing with your customers that you will not allow them to drag out payments. As you grow, you must print out your accounts receivable listing at least every 30 days and either follow up yourself or have your office assistant/A/R clerk call to promptly collect your overdue A/R.

Give it Time to Grow


Most businesses require three to five years to begin to mature and solidify. Thus, you will need patience and an understanding that you will not be “raking in the cash” for several years.

Your Psyche


Many entrepreneurs at some point in their business lives have been perilously close to bankruptcy or have actually had a business go bankrupt. While not always the case, entrepreneurs seem to have nerves or steel or at least give that impression. You may be able to be successful without those steely nerves, but they would be an attribute if you start a business, so you can face down the many challenges that will confront your business.

Post Mortem


It has been my experience that when entrepreneurs reflect upon their businesses, they almost all say that if they knew about the physical toll, long hours and financial stress they would endure, they would not have started their business.

But that is the wisdom or weariness of age. New entrepreneurs are driven and they have boundless energy and they do succeed in spite of the above noted risks and stresses. However, it is vitally important to plan and to try to implement or consider many of the factors I have noted above to make the journey a little less bumpy.


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