Why a start-up needs to make figures first?

The Firm

With more and more uncertain economic conditions and growing competitions from around the world firms of all seizes are in constant lookout for cost control at all areas of their business activity. One of the more obvious ways to do it is by laying off staff. Unfortunately, this is a cruel reality for all of us in the time that we live in. It seems that even when we reach a level of sophistication in our skills and ability as result of an ever faster changing working environment there is always something that we fall short off which determines if we are going to face the ‘chop’. It is for this reason, and many more, that despite global competitiveness and the feeling that markets are dominated by large players there is a constant supply of those wanting to start on their own. However, it is not always this gloomy. There are also a substantial number that start on their own for exactly the opposite reasons. Entrepreneurship is becoming more popular since many people are interested to gain a sort of freedom from their daily routine. Large number of them want to do their job from a place of their choice, which the help of technology has become perfectly possible for a variety of tasks. Actually, personally I know of a few number of firms that have created such conditions for their employees, work from location and hours of their choice, and in return have seen a substantial improvement in efficiency and ultimately reduced costs too.

However, reality is not so black and white, what entrepreneurs in reality face are long working hours, and independent lifestyle and decision making, and therefore independent facing of consequences. At the same time, it is these parts that some people aspire too in addition to potential gains, which goes alongside well known relation of risk and reward. Their importance and contribution in society’s well-being and development is undisputed. In the most developed countries, there is high concentration of small firms, and they are continuously rated according to the conditions for starting and operating of small businesses. The easier to start and more supportive the regulations the higher the country is rated. It is a fact that most developed countries are continuously ranked highest for many years, and expectation is that for a foreseeable future it will stay the same.

The Entrepreneur

Let’s turn our attention towards the actual people in the business; the entrepreneur. An ever adventurer and ready to take on new challenges to the point of self-denial. Relentless on their strive and often rely and believe on their own strength alone. They are always passionate on the idea and energetic to get things done as soon as possible. Because of this passion and energy of what they think they can achieve there is never enough challenges and constantly are on a search for new opportunities. This is all great, until it gets to a point that they lose interest on what they already are into or they ignore the warning signs, words of caution and discipline, and fall victim to their own over-optimism. Their confidence and reliance on their own abilities very often causes them to grow mistrustful towards others, including their employees.

These are all well-known characteristics and some of the internal causes that make majority of small firms to fail in their early stages. While entrepreneurs are energetic and excellent at spotting opportunities, so is the business by nature, their unstructured and chaotic way of operating very often causes the project to fall apart. Their risk-prone attitude leads them to push towards unnecessary risk without proper consideration of consequences. Their own fast paced life makes them impatient towards those that ‘don’t get it’ and those who prefer focusing on a single detail. Actually, focusing is a major problem which very often causes the failure of the project for reasons that although parts seem perfect, they still don’t fit together. This living in the moment may cause them to miss the bigger picture.

Reality shows that successful businesses concentrate to what they do best and keep repeating the same while at the same time learn and improve. Therefore, environments like school and repetitive administrative work is not an area that they can stay focused long enough. Unfortunately, the signs on which direction the business is going are found on exactly these two environments. Entrepreneurs need some solid understanding of business skills, such as accounting, which are acquired through traditional education. These skills will be put to practice in some sort of administrative work which considering the scale of operations for most of the small businesses, can be very entry level.

Operation

Although the structure of the entity and its decision maker(owner) greatly differs from the larger firms, the business operations of all sizes are the same. Separate from the size and balance sheet strength they all need to go out there and compete for customers. To dig-in straight into the topic, a small business, its owner, must learn as fast as possible what the business will do and where it will concentrate. This time on relying on her/his gut feelings but on hard facts; figures. During my many lectures with students from various backgrounds I constantly reiterate that accounting is not there just to record transactions that already happened. New approaches on the field view accounting in service to decision making. Let’s not forget that this is initiated by decision maker in the form of delegation of duty, delegation of duties always comes from above. How ca this work in reality? Well, one approach is to start from the business plan. This is why some people from the consulting and investing community insist having a business plan presented to them. It is in this early document where idea is described, and objectives are set within a certain time scale. Here is also described environment, market, that it will operate in as well as main players, competitors, that are expected to face during the on-going activities.

With own, or hired, solid skills in accounting and finance it should be worked backwards. Let’s not forget that we at a stage that the business hasn’t started operating yet. Therefore, the element of estimation is unavoidable, but at least some serious questions can be raised in case when they sound too optimistic. Be aware that there are a lot of credible information available at low or no cost to assist in estimating many figures needed for most of the industries. Once the estimation figure is agreed the calculation should continue smoothly. This is why is so important that students understand the meaning of a certain calculation, the elements comprising it. For example, calculation of ratios is not complicated, what is needed is to be able to put this understanding in the service of decision making. The owner should set expectations, target, and safety margins will follow from then on. If for example the owner sets a cost of won funds at 20% the calculation should take into consideration required profit levels to be achieved without forgetting the eventual effect of the time-value of money. This is not to calculate profit alone. Actually, profit is the last one. What is most important is to estimate revenues needed to reach given profit target. There are also taxes, depreciation of assets that may occur, operating expenses, and the price to be charged to customers. Given that we live and operate in a world of resource constrains, consequently there will be a limit of how much a business can produce and sell. This will lead to new level of exercise; scenario analysis. The more scenarios are estimated, the better, but emphasis should be on relevance. There can be made all calculations possible, if the information fed into those figures is not relevant or inaccurate the result will prove useless. Nevertheless, even in the hardest of cases entrepreneurs for the reasons resulting from their own characteristics should always start by doing some figures. If nothing else it will cause some reality to take place in case their idea has reached the overoptimistic stage.