One of the most difficult considerations for an entrepreneur is the risk/return analysis of the potential business venture. An incomplete or poorly-reasoned risk/return analysis on the part of the entrepreneur may lead a savvy financial investor to turn down a potential investment in the business in favor of an apparently less risky opportunity. Continue reading →

Planning for too little growth and trying to play catch up when growth exceeds expectations creates a number of challenges, such as the need to expand operations and capacity and the resulting requirement for capital expenditures and potentially, additional financial resources. However, planning for too much growth is just as bad, if not worse, in that overinvestment in equipment and materials reduces asset efficiency and return. Continue reading →

While many startup entrepreneurs have experience in a corporate setting, few have had experience actually running an entire operation on their own. In a corporate setting, there are already established relationships, financial resources, and managerial depth across other key functional areas of the business. Usually, in a corporate setting, the functional areas are also managed by different people. For example, human resources handles hiring and staffing issues, accounting handles the financial aspects and bill paying, the marketing department handles the marketing, and so on. Continue reading →

Too often, entrepreneurs believe the business will quickly generate enough cashflow to sustain operations and, thus, enter into the new business with insufficient financial resources. They may try to operate on a shoestring budget until the business reaches cashflow break-even out of necessity due to a lack of access to additional financial resources. This may involve getting behind on paying bills, which could hurt the business’s credit and relationships with suppliers and vendors. Obviously, in the absence of access to additional funding sources or lines of credit, the lack of cash also can quickly result in the closure of a business. Unexpected or unanticipated expenses can quickly lead to financial problems and growth constraints for shoestring operations. For example, the need for an additional employee to accommodate demand, but not having the funds to hire, can constrict the business’s growth and profitability. Continue reading →

A key part of the financial projections and business plan is for the entrepreneur to conduct a break-even analysis. The traditional break-even analysis reveals what level of sales a business must achieve to cover both the variable costs (cost of goods sold) and the fixed costs (overhead), resulting in $0 profitability. Beyond the break-even point, the business should be generating profits. Until the company reaches its break-even point, the business must have adequate financial resources to pay the bills and fund ongoing operations. Conducting a break-even analysis should enable the entrepreneur to test the reasonability of the business plan and financial projections. Continue reading →

Along the lines of the first deadly sin, the lack of a formal business plan is also common among small businesses and startups. New entrepreneurs often mistakenly believe that opening a business and putting a sign outside is enough. It is usually the business plan that segregates viable businesses from an entrepreneur’s hobby that they hope to make into a business. In some cases the hobby may be a viable business. Successful entrepreneurs create a thoughtful and realistic business plan prior to opening the business to determine if the business is feasible both financially and operationally. Continue reading →

The value of most businesses is the sum of the present value of the cash flows expected to be generated in the future. Amazingly, many entrepreneurs and new business owners are unable to provide a set of financial projections or budgets and the underlying assumptions. Many believe that growth of the business will just happen and that they will react to that growth by paying the bills, making purchases, etc. The most successful small business owners prepare, in advance, a forecasted income statement (or budget) and balance sheet that detail: expected revenue growth over the next three to five years, cost of goods sold, fixed costs or overhead, profitability, and how this translates into cash flow, the need for additional asset purchases, etc. Continue reading →