3 Ways Emerging Entrepreneurs Run Financially Sound Businesses
Securing funding is a major feat for any brand and requires a great deal of planning and expertise. However, the real value comes from turning that initial support into long-term growth -- transforming a spark into a sustainable fire. Without financial stability, eCommerce brands lack the foundation to tackle key business endeavors like evolving product lines, expanding geographic storefronts or making new investments into shipping and packaging that enhance the customer experience.
This is particularly true for emerging businesses transitioning from angel or first-round funding sources into companies with verified equity. These brands are no longer simply selling an idea but must be able to back their entire business model with a concrete financial plan.
As both the CEO of Dotcom Distribution and a CPA, keeping track of our financial standing is a critical component of managing a business -- at any stage, but especially in the early days. With a lineup of clients funded heavily by private equity, I’ve seen my fair share of financial successes, as well as blunders. With 50 percent of U.S. businesses failing within their first five years, it’s important that any emerging company makes smart financial decisions.
Here are three tips I find valuable when helping entrepreneurs keep their brands out of finance troubles:
1. Develop a clear vision/path to profitability.
It’s important to develop strict financial principles that govern all incoming and outgoing spending. If you are seeking capital through funding, you must demonstrate your expected return-on-investment (ROI) for those investors and detail where expenditures will go. You should also be able to explain how you intend to manage cash and receivables, and have a clear vision toward becoming, and remaining, cash flow positive. When involved in any type of private equity or venture capital funding, ‘building the business’ is no longer a detailed enough financial plan.
For example, if you intend to allocate $10,000 to marketing, why are you doing so? What outreach efforts are you going to push, and is your anticipated ROI based on real-world research? You should plan to speak to how you will stand out from competitors and compel consumers toward conversion. If you cannot demonstrate how future funding will build upon your existing business, investors will likely take their money elsewhere.
Part of following through on your finances is developing clear communication strategies with your investors, as this creates accountability for you and your team. Transparency with your funding sources will ensure they see you as a worthwhile investment and can enhance your own strengths. Also, when working with investors, it’s important to showcase business maturity. For instance, it’s imperative you implement segregation of duties, work processes and controls that support your key performance indicators and success drivers.
2. Use investors to increase financial viability
Your own finances are paramount, but it’s equally important to think critically about the success of your investors and partners. These players are backing your growth, and it’s a sign of good faith when you can make business decisions with them in mind. For example, if you have the chance to scale down a marketing strategy while maintaining growth or can cut costs by decreasing manufacturing inefficiencies, this helps stretch an investment further.
Helping your investors or partners often allows you to ask for help in return down the line. We have helped clients remove pain points on the manufacturing side and in turn have been able to help them save money. Those companies were later able to negotiate discounted supply chain costs, which ultimately helped to positively affect their cash flow.
3. Make sound hiring decisions.
I once had a client say to me “I don’t know if I’ll always be the CEO.” Shortcomings are tough to admit, but self-awareness is the mark of a smart entrepreneur who is focusing on the financial future of his/her company.
Others’ experiences and expertise are often the best way to avoid squandering important financial opportunities. We’ve been impressed by clients who knew when to bring in smart executives from other already successful eCommerce players. The people often better understand how to leverage finances (including private equity and venture capital funds).
Running and owning a business should never be all about money, but properly managing your finances is a key part of long-term success, especially in eCommerce sales. By using the tips above, you can help your company make the most of the investments it has earned. It’s also a good idea to add new technologies -- or seek out a partner that can add these technologies for you -- that will help you make smarter financial decisions when it comes to areas like advertising spend, strategies for liquidation, customer acquisition costs, etc.
As you continue to grow it’s not enough to just know how to spend or save money. Successful brands also need to know how to manage money on behalf of investors.