5 Finance Lessons Successful Entrepreneurs Learn

There’s a reason many entrepreneurs have a background in finance. The number of decisions that have to be made related to money when running a business can be overwhelming. That shouldn’t scare you if financial expertise isn’t part of your skillset, though. There are plenty of successful business owners who had no financial training before building a company. I’m raising my hand here.

Hands down, these are the best financial lessons I’ve found to be true in building a startup.

1.     Manage your cashflow.

I’ve seen entrepreneurs with a finance background struggle because all of their training blinds them to a basic financial concept that is more important to a startup than any other ­– cashflow management is crucial.

For a young company, it isn’t complex or exciting, and you aren’t going to get written up in TechCrunch because you made sure your startup spent less than it earned, but you’re likely to get something better – a successful business. Remember, if you always make more than you spend, you can run your company as long as you want to run it. Pause. Read it again. If you always make more than you spend, you can run your company as long as you want to run it.

This is the most common tip I share with new entrepreneurs but many times it doesn’t resonate. I think it’s because we see our peers getting public accolades and press for raising capital, so it’s tempting to see fundraising as the measure of success for a startup. But being a world class fundraiser doesn’t guarantee any founder agency over decisions regarding the future of their company. Adam Newman, founder of WeWork is an unfortunate example of this.

Bonus Tip:

If your business has inventory, managing cashflow can be the most difficult aspect of successful growth. It’s counterintuitive, but when your business is growing the fastest is when entrepreneurs can get sideswiped by poor cashflow management. This happens because more capital to fund more inventory is needed before the revenue grows. Figuring out lines of capital in advance of growth is key. 

2.     Make a budget and adjust it as you go.

Creating a budget and paying attention to it, forces entrepreneurs to be proactive, rather than reactive in leading companies. Let’s face it. The responsibilities of being an entrepreneur can demand founders spend a lot of time reacting to urgent needs. Quick decisions to spend more than originally planned are sometimes needed, but they add up quickly. Having a budget mindset allows you react to urgent needs while recognizing that unexpected expenses must be balanced out with cutbacks in other areas.

This starts with establishing an annual budget. Then, at the end of each month, the founders should review the budget versus actuals to see what adjustments need to be made. This discipline will establish the habit of leading with a well thought out strategy that can be iterated upon continually as it becomes clear what’s working and what isn’t.

Plus, going back to the first point, a budget is a critical tool in helping manage cashflow.

Bonus Tip:

Here’s my favorite startup budget template. Thanks to Atlanta Ventures for creating it and making it accessible to anyone. If this template doesn’t reflect the needs of your business, there are many other startup budget templates available online for free. Most finance software have budget templates as well. Spend the time to find one that’s a good fit you can tweak, rather than trying to fit your business into one that doesn’t match your needs.

3.     Focus on return on investment (ROI).

Following a budget is key, but how can an entrepreneur know how to adjust a budget to ensure the company’s allocation of resources will help the business grow? Paying close attention to the return on investment for marketing and sales initiatives as well as staffing expenses are fundamental here.

As founders make decisions about what to spend money on, goals must be set and measured to track how useful those decisions are. It’s so important to test every assumption made in the beginning stages of a startup when there are many unknowns about which investments will be successful and which will fail.

This is where we’re at with Meetify right now, and I expect we’ll be there for a minimum of two years before we have a decent sense of what works and what doesn’t work. This is honestly one of the hardest parts of launching a new business. Good decisions require data and data is limited at the beginning. As much as possible, I put in sweat equity and work on organic marketing initiatives at the beginning while doing small spends on paid marketing to see what performs best.

Over time, data reveals which initiatives provide the highest return on investment. Then, you know what to pour more fuel on and what to stop doing. Too many entrepreneurs double down on their favorite marketing channels or ones that have worked for them or another entrepreneur in the past. They forget about ROI to their company’s detriment.

This is something I’m trying hard to remember with Meetify. Return on investment is the key to evaluate what expenses need to be adjusted.

Bonus Tip:

Here are some simple ROI calculators for marketing expenses along with some decent explanations about when companies would use each one.

4.     Create a revenue forecast and update it monthly.

How much money the company spends is only one side of the equation. The other side, the income side, is what you’ll concentrate most of your day-to-day efforts on. Creating a projection of revenue at its simplest involves forecasting how many new customers you’ll acquire and lose each month, and how much they will pay you for your products or services.

There are many different forecasting models, and once you’ve found the best model for your business, it’s helpful to create two forecasts – one that’s conservative to use for your initial budgeting efforts, and one that’s aggressive to goal set against as you lead the company and communicate the vision. Once again, this can help with the all-important cash flow management. It’s also good to know that making projections gets easier over time as historical data becomes available.  

I really dislike this fact, but I tell other founders the only thing they can guarantee about initial projections is that they’ll be wrong. Of course they will. We have no historical data to base them on. Having a good forecasting model to start with ensures an entrepreneur can see where modifications in assumptions would be useful. It also helps founders know how to adjust their spending, which helps with the most important rule about managing cashflow.

Bonus Tip:

If you aren’t the one who creates your forecasting model, make sure you understand the projections inside and out and can change the assumptions on your own. You don’t have to create a tool to become a master at using it, and this is a tool you want to master.

5.     Protect against downside risks.

This lesson is just as true for business owners as it is for investors. Even though being an entrepreneur requires being more comfortable than the average person with risk taking, the key is to make sure the risks are calculated and the downsides protected against.

The best protection is to estimate how risky any financial decision is to your business and resist moving forward when the risk is too great. In other words, only bet what you can afford to lose. It’s helpful to keep this in mind when hiring an expensive consultant or new employee or when starting a new revenue stream.

Another way to protect against risk is to plan for losses that increase as the risk level increases for any decision. Increasing your reserve fund level in proportion to the risk level for big decisions helps.

Diversifying a company’s revenue streams is the best line of defense against risk. When one stream dries up or goes through a tough season, others can balance it out and hold the business steady until the challenge is overcome.

This was one of the best things we did with SignUpGenius. We had four lines of revenue. At different times, two lines took dips, but the others were growing well, so overall, the business continued to grow strongly. Multiple revenue streams can also help to even out cashflow if there’s an annual cyclical nature to any of the streams.

Bonus Tip:

Being wise about how much change an entrepreneur introduces to the product offering in a short span of time protects against downside risks. The customers are the best guides to advise on how much product disruption should be attempted and how quickly.

None of these critical financial lessons require a degree. As long as you’re willing to put in some time to learn and find the right finance people to support you, the financial health of your company can be strong and provide a great base for growth.