The decisions you make on day one of your business have a ripple effect that can impact your business for years to come.
How you structure your business in the beginning has a permanent impact on how efficiently your business will grow in the future. It is highly likely that in years four, five, and six, you’ll face issues that have their root causes in the decisions you made on day one.
So it is no wonder that when an entrepreneur starts their second or third business, they incorporate the lessons they learned from their first startup.
I’ve been fortunate over the past eight years to work with hundreds of entrepreneurs who have come to the point where they want to sell their business. That decision requires that they take a moment to reflect on their successes and their failures. During these times, the impact of those first decisions is evident.
3 mistakes to avoid when starting your business:
Mistake #1: Putting off record keeping
There is no doubt that starting a new business is hard work. There are long hours, moments of self-doubt, and the mentally exhausting task of working in multiple roles within your new startup.
So it is no surprise that many founders put off implementing financial record keeping, monitoring, and budgeting.
But this is a mistake. Stanford University professors George Foster and Antonio Davilia studied 79 startups to measure the impact of early implementation of financial reporting systems. Here’s what they discovered:
They found firms that quickly institute formal mechanisms such as operation budgets, cash budgets, and financial monitoring systems (tools that measure profitability, customer acquisition costs, variance from actual budget, and so forth) had higher growth rates in terms of revenues and headcount. They also had greater and more rapid increases in valuation at successive rounds of venture capital funding.
The fact is, bookkeeping can be hard to learn. Most new entrepreneurs think of their funds as “money in and money out,” yet bookkeeping concepts involve such quirks as the double-entry system or cash basis, versus accrual basis accounting. These concepts visualize the financial ecosystem of your business in a more complex and far more complete manner.
This added complexity often pushes founders to resort to simplistic Excel spreadsheets or to rely on bank statements to get a sense of the business’s financial health. For those that do venture into accounting software such as QuickBooks or Freshbooks without understanding the concepts of accounting, the results can be confusing and inaccurate books. Garbage in produces garbage out.
So it is important to take the time early in your startup to keep clean, detailed financial records.
Clean financial records will help you:
- Make better decisions for your business.
Successful startups make data-driven decisions rather than relying on instinct and “feel.” Your financial records are a key driver of relevant data.
- Get credit for your business.
New startups need to be agile and flexible. Getting credit when you need it can be a very useful tool, but you’ll need clean financial records to get credit.
- Be compliant.
An audit can wreck a new business. Keep your books to protect your business from being dragged down through a costly audit.
Smart entrepreneurs know when to outsource, so you may want to consider hiring a professional bookkeeper. But don’t hire the first bookkeeper you find. There are 1.7 million bookkeepers in the U.S. alone, and many of these bookkeepers are less than perfect. A bad bookkeeper can be worse than keeping no books at all.
So before you hire a bookkeeper, have a plan to interview at least five candidates. Research questions you should ask, and ask these following five questions (at minimum).
Before you hire a bookkeeper, start with these five questions:
- Have you ever managed books for a business like mine?
Doing accounting for a manufacturing firm is significantly different than it would be for an attorney, restaurant, or eCommerce business. Be sure your bookkeeper is familiar with your industry.
- Can you explain the difference between…
You want to have a bookkeeper that can help you understand your books. When you interview your bookkeeper, ask them to explain various accounting concepts and gauge how well they communicate complex concepts. For example, have them explain the principles of the balance sheet or the difference and usefulness between accrual basis and cash basis accounting.
- How will I be able to access my books?
You should own your financial data. If your bookkeeper acts as the gatekeeper of your books, you’ll be forced to request access whenever you need a report. Make sure you can access your books at any time.
- How often will you update my books?
There are few things more annoying than your bookkeeper asking you to produce a receipt or explain a transaction that happened nine months ago. Make sure your bookkeeper will visit your books frequently, so you always have current reports.
- Can you inspect my current books?
When interviewing a bookkeeper, ask them to review—and criticize—your current books. This will give you great insight into their views and approach to keeping stellar records.
Mistake #2: Choosing a business partner for comfort
Elon Musk, who happens to know a few things about starting successful companies, gave this insight at a conference in New York:
“Creating a company is a very difficult thing. A friend of mine has a saying: ‘Starting a company is like eating glass and staring into the abyss.’ You have to do lots of things you don’t like.”
Starting a business can be incredibly scary, so many entrepreneurs turn to a business partner out of the idea that there is strength in numbers. It’s comforting to have someone just as crazy as you are, someone who will affirm that the risk you take is a calculated risk.
But taking on a partner for comfort is a really bad reason to add a business partner.
When determining whether to take a partner, consider the following:
- Your business needs to be twice as successful.
Bringing your business to a point of success is difficult, and if you bring a partner on board, you’ll have to be twice as successful to make your time and effort worthwhile. While a business partner will help carry some of the workload, it takes more than hard work to be successful.
- Your vision will be shared.
While it is often a good idea to have someone that you can test your ideas against, having a business partner is much more than having a sounding board for new ideas or your vision for your startup. Your business partner will be entitled to put their fingerprint on the business just as much as you.
- Partner disputes can lead to an early exit.
I consult with founders who are ready to sell their startups and move on to new opportunities. Unfortunately, a significant percentage of businesses for sale are due to partner disputes. Many of these businesses are great opportunities that the owners would keep—if they could just get rid of their business partner.
- A partnership is like a marriage.
If you enter into a partnership, get ready to spend a lot of time with the person you partner with. Entering a partnership is like entering a marriage: you make a commitment to another person to help them reach success. While this can be useful on days where you need reassurance, it can be draining if the partnership begins to fail.
Despite this, bringing on a partner is not always a bad idea, but be sure your reason for bringing on a partner is well-founded. With well-founded reasons for entering into a business partnership, you can grow your business significantly faster than going into business by yourself.
Good reasons to bring on a partner may include their network of contacts, their specialized skills, or their willingness to oversee an aspect of your business that you would rather not touch.
So before you bring on a business partner, ask yourself this: Am I doing this just because I want comfort? Does this person add value to the startup? Can I get this value through a hired employee or contractor? If they truly add value, then go for it. Otherwise, take a deep breath and learn to overcome your fear of failure.
Mistake #3: Falling in love with an idea
“Sometimes I ask people, ‘How do you choose to suffer?’
These people tilt their heads and look at me like I have twelve noses. But I ask because that tells me far more about you than your desires and fantasies.
Because, you have to choose something. You can’t have a pain-free life. It can’t all be roses and unicorns. And ultimately that’s the hard question that matters. Pleasure is an easy question. And pretty much all of us have similar answers.
The more interesting question is the pain. What is the pain that you want to sustain?”
Before I was an entrepreneur, I was a political consultant. At the time, I was enamored by the excitement of politics and campaign strategy, so it was a bit sobering when I spent a summer on a campaign for a state held office. The substance of my candidate’s strategy was to knock on doors from 9 a.m. until 9 p.m.
It was hardly the stuff of most political dramas, but he won by over 20 points.
Starting a business can be a lot like that political campaign; there are more mundane, “grind-it-out” tasks than exciting strategy. In Mark Manson’s quote above, you have to choose how you are willing to suffer in order to achieve the idea.
You have to learn to love business execution.
Unfortunately, too many would-be founders give up on their good ideas because they paid too much attention to the idea, and too little attention to how they would execute their startup plan. When they realize the grind, the loneliness, and the reality of what it takes to make an idea reality, they give up and go back to what is easier.
Become obsessed with measuring your results in order to refine your execution strategy (which, of course, requires that you keep records from day one).
The rewards of a successful startup
The fact that I have had the opportunity to work with entrepreneurs who are on their second or third business is a testament to the rewards of the entrepreneurial life.
Despite the struggles, hard work, and mundane days of a startup founder, the end result of seeing your idea come to life puts the early startup days into perspective.
As you plan for your startup, commit yourself to keeping great records and your business execution. Before you bring on a business partner, question your motivations.
Finally, reach out to other entrepreneurs and ask them what lessons they learned from their startups.
By doing so, you’ll jumpstart your startup from day one.