The biggest mistake Entrepreneurs Make?
An entrepreneur is that guy, not only with the BIG Idea, but with the GUTS and the follow through to get things moving forward. An entrepreneur is able to look at the big picture and cut through to the bottom line.
Imagine that an Entrepreneur has clients that are willing to purchase his services over a three-month period. During that time, the Entrepreneur has to feed his family, has to pay the rent on his new office space, and has to pay for other expenses that are incurred in order to provide his services. Timing is everything. At the end of the three-month period the Entrepreneur may be on his way to millions with his million-dollar idea. But will he make it past the first three months?
Not all entrepreneurs are finance experts. The biggest mistake I see when it comes to start-ups are Entrepreneurs who don’t understand the difference between Cash Flows and Profit and Loss statements. Knowing the difference could be the life or death of the start-up, even if the basis for the start-up is gold.
So what is the difference between Cash Flows and Profit and Loss? And which is more important during the start- up phase? Profit and Loss statements only include transactions that are relevant to the period. Example: a Start- up rented office space, made a down payment and paid 6 months in advance. The Profit and Loss Statement for the first quarter would show only the rent paid during the period, whereas Cash Flows would show that there was cash out for the entire amount paid.
So why is this important? Because even if the bottom line isn’t in the red, there may be and probably will be times that there are negative cash flows. Planning ahead for these moments is extremely important in order to avoid them and avoid the failure of another start- up.
Most entrepreneurs know the importance of planning and budgeting, but it is exactly how the plan is structured that is important. How should a solid business plan be structured? Most big corporations use daily cash flows to forecast. Start-ups need to use daily or monthly cash flows for planning as well. Let’s go back to our original Entrepreneur who won’t be paid until after the first three months. The Entrepreneur has obtained financing for the first three months for his living expenses, and for some of the costs he will incur to provide services. He has a professional prepare a budget Profit and Loss for the initial three-month period.
He’s feeling good about his idea and his plan so he sets off to make millions. But come Day 1, and oh no! Unexpected expenses for office space (down payments, and advance payments), all included in the business plan by the professional but our Entrepreneur didn’t understand that the “total costs” on the Profit and Loss Statement were not actually the “TOTAL” cash out during the period. So what is the biggest mistake Entrepreneurs make? Overcompensating lack of understanding of finance with complicated professional business plans. Entrepreneurs who simplify are those who succeed. A simple Cash In minus Cash Out calculation could have saved our Entrepreneur.