Valuable Lessons For Business Money Management
Business Finance 101.
Before 2008, many of us thought we had it made, self-included. I could say “I had a friend who…,” but I’ll admit it was me. I lived in a 6200 square foot house and drove a seven series BMW. When 2008 hit, the horror began. By the time 2008 finished, it turns out I was probably a little too easy on the finances, living in a two-bedroom apartment, driving a 20-year-old truck and my savings were $110,000 lighter because of it.
Most financial gurus only show you the sugar and spice; I hope to capture the twists and turns that led me from giddy optimism to the depths of despair.
Once the owner of my own residential mortgage company, I had the idea to start a luxury development company to diversify before the mortgage fall-out we all seen coming. Being in the mortgage industry, I was no stranger to how to manage business and 20 plus years in finance taught me how to manage a business’ finances.
The time had come to search for financial backing. I had a business plan, the land, and a keen sense of timing. That’s when things started unraveling. Shortly after I began my search, I was recommended to a man who embraced my plan. “He was all over it right away,” and he agreed to help me gain the necessary capital. Inside of 1 year, Mr. Wonderful, Mr. Well connected, whom I’d trusted kept me in the dark about financial developments while he sought venture capital, then skipped town with the cash after a successful fund-raising meeting and the project continued without me.
In the end, I was left holding the bag. I ended up losing my home, my car, and my possessions, paying about $110,000 to unhappy investors.
One of Many Lessons
Those of us in the industry have all heard stories like this before. In fact, I stumbled across a painful, though familiar, a lesson for many entrepreneurs who are looking for capital: Keep your eyes wide open, keep your feet on the ground, and do your research about advisors.
You must have the best of the breed. The quality of your advisors is essential. That means you should have top-tier legal and accounting firms. Financial management for small business owners is no small feat and should not be taken lightly.
With this experience behind me, my goal now is to make sure fewer people suffer my pain. To date, I’ve seen plenty of strong and weak business plans, and I’m quick to offer some absolute rules for money management, including the necessity of having professional advisors. For those with visions of sugarplums, my advice today may be a tough tonic. For the realists or those who have learned the hard way, the wisdom may be obvious.
- Be realistic—honestly evaluate your strengths and weaknesses—both for your business and yourself.
Don’t be wildly optimistic, a venture capitalist is looking for someone who has his feet planted in reality.
- Have a clear, logical business plan—one that is based on a good, old-fashioned business model.
That’s right: old-fashioned. There’s a phase shift in the market. So many businesses in the dot-com phase were fueled by ignoring basic rules of profitability. Now, there’s a sensitivity to money. Investors have awakened to the values of clear profitability, revenue creation, and other fundamentals of business sense.
One of the red flags of a weak business plan for investors is the inability to see the real dynamics of your business. If you have a well-conceived business plan, an investor will be able to see the essentials, such as how you generate revenues and how large a market share you’re aiming for. Again, be realistic about your target market share. Check your current practices against techniques used by the top money managers. The reality is that, if all you’re aiming for is a 2-percent market share, you’re not going to make it.
Your plan should also clearly show investors an exit strategy so that they can liquidate their investment.
- Don’t overextend and get into too much debt.
Entrepreneurs will get ahead of themselves, in anticipation of the money which might come in from investors. They spend when there’s nothing there. Know what your runway is.
- Know when the time is right to look for capital and be realistic about what your business is worth.
Like the average homeowner, you should be aware of the estimated value of your business. Examine what the competition is doing. For example, you know the real value of your home based on sales of comparable homes in your neighborhood. Similarly, you should know the value of your business—and know the consequences of overestimating that value.
The bottom line is that you value a company similar to the way you value a home. Most valuations are fixed relative to other players in a particular industry. However, use sensible data to determine what the other companies are worth.
- Work, work and work more.
Regardless of whether you’re just starting out or finishing a round of venture capital funding, you can never underestimate the task at hand. Remember that success doesn’t happen overnight, and you’ll have to make sacrifices.
In retrospect, I know I had double blinders on. Like a doctor being her own worst patient.
Poorer for my experience, I was not deterred. Yes, it was embarrassing, but it was a good lesson that a person has to be levelheaded about their business. Just this small time investment of time, into tracking your business’ financial health will pay off big in setting and reaching the best business goals for you.
Michele Y. Thompson is an author, contributing writer on MyStock911 and MortgageExpertGuide , commercial mortgage broker, entrepreneur, and finance coach. The culmination of her work in mortgage banker finance, global investor services, real estate, and debt consulting; along with her advanced degrees has driven her to help new and existing businesses reach their goals for over 20 years.