Entrepreneurs not always good financial managers

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A day in the life of a typical small business owner can be hectic.

Many are so busy running the day-to-day operations of their businesses that the financial aspects of the company are often overlooked. Nonetheless, the bottom line of a business won’t improve by itself.

“Most small business owners are really challenged just to get their financials out — not to mention smoothing out revenue in a legitimate way,” said Ric Denton, counselor and immediate past chairman of the Colorado Springs chapter of SCORE, the Service Corps of Retired Executives. “There are small businesses that do have their act together with good planning in place, but I would say they are the exception rather than the rule,” Denton said.

The topic at the latest Colorado Springs Technology Incubator’s Business Series breakfast was “Financial Management of Venture Companies.”

Keynote speaker Jeff Schneider, president of EFA Services Inc., an entrepreneurial finance and accounting firm, had advice for entrepreneurs who need outside capital to meet their goals and an exit strategy to return money to investors — in other words, business owners who need financial management.

Meeting payroll each month or preparing taxes annually does not constitute such a plan.

Financial management has three elements: “accounting process” (payroll, invoicing, paying bills, etc.); “accounting practices” (recording and reporting historical financial data); and “financial analysis” (using financial data to make management decisions).

When Schneider asks people who is doing their financial management, he’s likely to hear that a relative is “doing the books.”

“That’s a lot different than financial management,” he said.

He likens the difference between large businesses and small companies to commercial airline pilots versus private pilots and propeller planes.

“You still have a checklist for a small plane. You don’t just jump right in and fly,” Schneider said.

His recommendations for the accounting process include paying your bills — especially those that can impact your personal credit rating; outsourcing payroll because of the state and federal laws involved; reconciling bank accounts and credit card accounts; and following a regular schedule.

And for accounting practices, small business owners need to know the difference between cash versus accrual accounting; generally accepted accounting principles; balance sheet — capital, loans, fixed assets and liabilities; and accurate monthly financial statements.

Accurate statements are necessary to “see what’s going on in your business — the trends,” he said.

For instance, if monthly revenue is computed on a nonaccrual basis, it will vary from month to month and can look like a zigzag when graphed. “But if you defer revenue (using accrual accounting), then you have a trend line,” he said.

With a little hard work and some good fate, that trend line can even head toward the sky.

Lastly, financial analysis involves the future.

In order for small business owners to succeed, they need to know where they’re going with their financials.

“Accounting deals strictly with the past,” Denton said. “But you need to have projections to know if you’ll be OK in the future.”

First a company needs sale projections, in order to calculate financial projections.

“Even as a small company, you really need both a chief financial officer and an accountant — even part-time — giving you good advice,” Denton said.

The future of a venture company — or any business, for that matter — depends on four things, Schneider said, “C-A-S-H. How much is needed; how much will be generated, and how much will be returned to investors.”

Analysis necessitates a short-term operating plan, and a long-term financial plan. Components of a long-term plan include profit and loss statements, balance sheets, cash flow, capitalization table and investor return calculation.

Not every investor will want to see the financial plan.

“Maybe not family or your close friends — but angel investors will want it,” Schneider said.

The plan won’t be easy to create, nor will it be accurate six months later.

“So why do it?” he said.

Because it gives business owners a “financial prototype,” which helps to better understand the business and what they’re trying to accomplish.

Not to mention someone might actually ask for the financial plan.

More importantly, “if it doesn’t work on paper, then it probably won’t work in real life,” Schneider said.

Small business owners can do much to improve their odds of success.

While CEOs tend to concentrate on operations management, human resources management and marketing/sales management, it would behoove them to likewise pay attention to financial management.

As a SCORE counselor, Denton has met with many people who don’t realize the importance of rigorous accounting and financial planning.

“Some people are clueless in accounting and come up with the craziest set of charts I’ve seen in my life,” Denton said. “And I just want to cry.

“Unless they are especially knowledgeable in accounting, I’m a strong advocate of outsourcing.”

Instead, business owners ought to be out in the marketplace, promoting their business and spending their energies driving revenue.

Rebecca Tonn can be reached at rebecca.tonn@csbj.com or 719-329-5229.