FINANCING YOUR BUSINESS
The financing of most entrepreneurial companies begins with the owner’s checkbook and credit cards. “One definition of a small business is that if you have never put a payroll on your Visa, you’re not a small business,” says Ed Zimmer, CEO of ECCO, a Boise, Idaho, manufacturer of lighting, alarm, and other safety-related products. Some entrepreneurial companies continue to work on that basis. But most soon establish a business checking account, keep regular books (using QuickBooks or other accounting software), and hire a bookkeeper. At some point along the way, many entrepreneurial companies look for additional funds to finance their operations and growth. There are three generic sources of financing:
- Owner financing. Entrepreneurs often put a lot of their own money into their businesses. They draw down their savings accounts. They take a second mortgage out on their houses. Their contributions of cash can be structured as equity investments in the business or as loans from the entrepreneur to the business. You should get an accountant or financial adviser to help you figure out the best way to structure the financing, taking into account taxes, future banking and financing requirements, and other considerations.
- Other equity investment. If you get friends, family, or so-called angel investors to put money into the business, they will expect shares of stock in return. That is, they will be co-owners of the business with you. If their investment is large enough, they may be entitled to a seat on the board of directors, a say in major decisions, or both. They are your de facto business partners and shoulder part of the risk of the business. If you succeed, their stock will grow in value. If you fail, they may lose their investment.
- Debt. Of course, you can also ask for loans from friends and family, or from your local bank. Banks won’t normally lend money to start-up businesses, but they will often lend to a start-up entrepreneur provided that the entrepreneur’s personal finances are healthy enough to ensure repayment of the loan whatever the fate of the business. People who lend you money are not part owners of the business and aren’t entitled to a say in major decisions. But you do have to pay them back on the agreed-upon terms. If you fail to do so, they are likely to have a legal claim on your assets.
BUILDING A FINANCIAL STAFF
An entrepreneurial company typically starts out with one person on the financial staff: a part-time bookkeeper (who may be the entrepreneur himself or herself, or a spouse). As your company grows, you may need a full-time bookkeeper (or bookkeeping firm), and you will also need an accountant, who can review your financial statements and prepare tax returns. For many companies, that’s enough—particularly if your accountant is also qualified to serve as a financial adviser. “In my company, it was not until year three that I had internal accounting people,” says Chip Conley, CEO of Joie de Vivre Hospitality, a San Francisco – based hotel company that now has nearly $200 million in revenues. “For two years it was just outsourcing.”
But if and when your company grows significantly bigger, you will have to add full-time financial staff. Here’s a guide to the different titles and what they’re responsible for in larger companies:
- Chief financial officer. CFOs in many companies are in charge of other internal departments as well, such as human resources and information technology. But their chief job is to oversee the management and strategy of the organization from a financial perspective. They are ultimately responsible for all the financial functions. In an entrepreneurial company, it is typically the CFO who plays the leading role in lining up financing, negotiating and structuring loans, managing cash flow, and making decisions about the company’s capital structure. The CFO is also ultimately responsible for the quality of the financial reporting. And he or she should use that information to advise you on the financial issues facing the company.
- Treasurer. In larger companies, the treasurer is the financial person who deals with the outside world—meeting with analysts (for public companies), communicating with investors, and negotiating with bankers. Some would say that the ideal treasurer is a finance professional with a personality. The treasurer reports to the CFO.
- Controller. Again, this is a separate position only in larger companies. The focus of the controller—sometimes spelled comptroller—is purely internal. His or her job is providing reliable and accurate financial reports. The controller is responsible for general accounting, financial reporting, business analysis, financial planning, asset management, and internal controls. He or she ensures that day-to-day transactions are recorded accurately and correctly. Without good, consistent data from the controller, the CFO and the treasurer can’t do their jobs.