Finance 101 For Startups
JUNE 26, 2006
BusinessWeek.com
Small Biz
By Douglas MacMillan
Finance 101 For Startups
Small business guru Steven D. Strauss talks about the steps needed to secure financial stability in your new business
Two years out of law school, Steven D. Strauss decided that he was meant to be an entrepreneur. So he started his own California-based law firm specializing in business and bankruptcy. Since then, his enterprises have grown to include Strauss Seminar, a widely syndicated weekly small business column called Ask an Expert, and the online resource MrAllBiz.com.
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He also provides consulting services to large companies trying to understand the small business market. Strauss jokingly refers to himself as a "recovering attorney" because he now devotes most of his time to dishing out entrepreneurship advice.
His most recent book, The Small Business Bible, takes new entrepreneurs through a comprehensive startup crash course and offers established business owners practical advice on accounting and taxes, human resource management, and franchising.
BusinessWeek.com intern Douglas MacMillan recently spoke with Strauss about the best ways to ensure financial stability in a burgeoning small business. Edited excerpts of their conversation follow.
Why are you interested in how small businesses are run?
I grew up in an entrepreneurial household, around small business people. My dad owned a chain of carpet stores in southern California. He once told me that an entrepreneur is a person who's willing to take a risk with money to make money, and I still remember that definition. That's something I just grew up thinking about.
In The Small Business Bible you claim that "Not everyone is cut out to be an entrepreneur." What is the best way to find out if you're up to the task?
You have to ask yourself a question. If the idea of leaving your job and your benefits and your insurance and a steady paycheck every two weeks kind of gets you excited, then you're an entrepreneur. But if the idea of leaving your job and all that stuff scares you more than it excites you, then maybe you're not an entrepreneur. (see BusinessWeek.com, 6/4/06, "Test Your Small Biz Temperament").
After an entrepreneur has developed an idea and a business model, how does he know when is a good time to go to an investor and seek financial help?
Most small businesses are funded through the friends and family plan. That is, you go to your mom or dad, and you see if they have some money to invest in you and your associates. If you have a really good business plan, a really good idea, a management team, and you have a bigger business idea, then you can start looking to angel investors and venture capitalists, and things like that. Most small businesses are started with your own savings, or credit cards—which is not my favorite way to fund a small business—or friends and family (see BW Online, 4/19/06, "Think Twice Before Borrowing from Family").
What is dangerous about going the credit-card route?
Well, the first couple years of a new business are the hardest, typically. And you don't want to run up a bunch of credit-card debt that you're going to have a hard time paying back.
What's the most important thing to have when you're looking for financial backing?
A really good plan. Come up with a business plan, know how you're going to make money, and know who your competition's going to be. Know how you're going to beat the competition, figure out how much it's going to cost you, and figure out how you're going to pay that money back—that's critical.
So when you go to your investors, they see that [you have] a legitimate, real idea with a plan for success. Because [as] innovators and entrepreneurs, we're big on ideas and we're really big on enthusiasm. But you need more than that. You need the nuts and bolts of the numbers if you're going to get some investors.
What are some of the most common financial problems you see small businesses run into when they first get going?
I always say there's two parts to any business: there's the part you love and you're passionate about…that you're probably really good at. Then there's everything else: the law, the taxes, the payroll, and the insurance. All that other stuff you have to know and have to do if you're going to get to do the passionate part. But most small businesses are long on passion and short on the other stuff. So I recommend finding as much help as you can with the other stuff.
When is it healthy to worry about the bottom line, and when can it be distracting?
We're all here to make a profit. You have to make a profit or you don't get to do that thing that you love to do. So you have to be concerned about it.
But you want to make sure that you're serving the market, that there's a need for whatever product or service you're providing. If you can fix a problem better than somebody else, and maybe for a little cheaper, they're going to be knocking at your door. If you do that, you don't have to worry about the bottom line.
But you have to always be cognizant of the numbers. You have to know how much you're bringing in every month, how much is going out every month, and what your profit margin is. Basic financial calculations will help you run your business much more smoothly
BusinessWeek.com
Small Biz
By Douglas MacMillan
Finance 101 For Startups
Small business guru Steven D. Strauss talks about the steps needed to secure financial stability in your new business
Two years out of law school, Steven D. Strauss decided that he was meant to be an entrepreneur. So he started his own California-based law firm specializing in business and bankruptcy. Since then, his enterprises have grown to include Strauss Seminar, a widely syndicated weekly small business column called Ask an Expert, and the online resource MrAllBiz.com.
Advertisement
He also provides consulting services to large companies trying to understand the small business market. Strauss jokingly refers to himself as a "recovering attorney" because he now devotes most of his time to dishing out entrepreneurship advice.
His most recent book, The Small Business Bible, takes new entrepreneurs through a comprehensive startup crash course and offers established business owners practical advice on accounting and taxes, human resource management, and franchising.
BusinessWeek.com intern Douglas MacMillan recently spoke with Strauss about the best ways to ensure financial stability in a burgeoning small business. Edited excerpts of their conversation follow.
Why are you interested in how small businesses are run?
I grew up in an entrepreneurial household, around small business people. My dad owned a chain of carpet stores in southern California. He once told me that an entrepreneur is a person who's willing to take a risk with money to make money, and I still remember that definition. That's something I just grew up thinking about.
In The Small Business Bible you claim that "Not everyone is cut out to be an entrepreneur." What is the best way to find out if you're up to the task?
You have to ask yourself a question. If the idea of leaving your job and your benefits and your insurance and a steady paycheck every two weeks kind of gets you excited, then you're an entrepreneur. But if the idea of leaving your job and all that stuff scares you more than it excites you, then maybe you're not an entrepreneur. (see BusinessWeek.com, 6/4/06, "Test Your Small Biz Temperament").
After an entrepreneur has developed an idea and a business model, how does he know when is a good time to go to an investor and seek financial help?
Most small businesses are funded through the friends and family plan. That is, you go to your mom or dad, and you see if they have some money to invest in you and your associates. If you have a really good business plan, a really good idea, a management team, and you have a bigger business idea, then you can start looking to angel investors and venture capitalists, and things like that. Most small businesses are started with your own savings, or credit cards—which is not my favorite way to fund a small business—or friends and family (see BW Online, 4/19/06, "Think Twice Before Borrowing from Family").
What is dangerous about going the credit-card route?
Well, the first couple years of a new business are the hardest, typically. And you don't want to run up a bunch of credit-card debt that you're going to have a hard time paying back.
What's the most important thing to have when you're looking for financial backing?
A really good plan. Come up with a business plan, know how you're going to make money, and know who your competition's going to be. Know how you're going to beat the competition, figure out how much it's going to cost you, and figure out how you're going to pay that money back—that's critical.
So when you go to your investors, they see that [you have] a legitimate, real idea with a plan for success. Because [as] innovators and entrepreneurs, we're big on ideas and we're really big on enthusiasm. But you need more than that. You need the nuts and bolts of the numbers if you're going to get some investors.
What are some of the most common financial problems you see small businesses run into when they first get going?
I always say there's two parts to any business: there's the part you love and you're passionate about…that you're probably really good at. Then there's everything else: the law, the taxes, the payroll, and the insurance. All that other stuff you have to know and have to do if you're going to get to do the passionate part. But most small businesses are long on passion and short on the other stuff. So I recommend finding as much help as you can with the other stuff.
When is it healthy to worry about the bottom line, and when can it be distracting?
We're all here to make a profit. You have to make a profit or you don't get to do that thing that you love to do. So you have to be concerned about it.
But you want to make sure that you're serving the market, that there's a need for whatever product or service you're providing. If you can fix a problem better than somebody else, and maybe for a little cheaper, they're going to be knocking at your door. If you do that, you don't have to worry about the bottom line.
But you have to always be cognizant of the numbers. You have to know how much you're bringing in every month, how much is going out every month, and what your profit margin is. Basic financial calculations will help you run your business much more smoothly