Startup Lessons,

#StartupLesson EP013: 7 Most Common Financially Crippling Mistakes Startup Founders Make and How to Avoid Making Them w/ Molly Montgomery

June 01, 2017

We bring yet another great episode for you this week.

The law side of things in relation to start-ups is something we’ve been wanting to look into for a long time because it is often overlooked and yet it is quite an important aspect of starting and running a successful startup.

So we thought it would be fitting to bring Molly Montgomery [Twitter] who is an owner of a consulting firm that targets high growth startups. Her consulting firm does growth consulting, risk management, and all financially related services.

She also has professional training as a CPA.

Her experience in the litigation world; seeing a lot of things that were happening to startups after-the-fact when they couldn’t really do anything about them is what motivated her to pursue an entrepreneurial route where she’d help these businesses prevent many of these mistakes.

In this episode, you will learn about the 7 most common financially crippling mistakes startup founders make and how to prevent them.

Key Takeaways

The 7 Most Common Financial Mistakes [9:30 – 41:00]

At some point, the financials and the legalities of your business should be on top of your mind, preferably right from the start.

In business there are a lot of risks involved, and as everything falls into place, you must be mindful of those conversations you have at the beginning, the partnerships, what you put on paper and the verbal agreements that are so easily taken for granted.

What seems like a loss of time when dealing with these necessities actually saves you from so much more that isn’t even quantifiable.

The following are the most common issues  with most companies

Not understanding how you draw money from the company in relation to the type of entity that you’ve set up as an owner

 How you withdraw differs from each type of entity and each has an impact on your taxes in different ways. Most people have no clue until some time later when they have to file their taxes and they are hit with a huge tax bill.

The types of entities include LLC, Partnership, C-Corp, and S-Corp. It’s important to know that when you’re taking money out of the company; you’re either paying yourself a salary, drawing it as a distribution, paying a profit share or dividend.

It is advisable to ask your tax advisor questions around that and to do it right before the end of the year. The common behaviour is chucking it under the rug, until some odd years later when the company has to pay the IRS for a mistake they didn’t even know existed. Don’t have common behaviour.

Get a financial advisor in the beginning for proper guidance. Most people rely on their attorneys and assume that they should tell them about everything. However, attorneys and CPAs come from different contexts and a lot of the time they don’t even agree.

The attorney does not fully understand what’s happening on the tax side of things so, it is better to find someone who knows it thoroughly.

In the beginning, the practice of being, “safe than sorry” is a worthy pursuit.

Not properly measuring growth or performance

 A growth cycle usually involves: Getting revenue traction, getting clients, and the traction builds, and more employees get hired and the problem is that the company will still focus on one thing, the revenue. Which leads to them becoming stuck.

Understand the company, your industry, your goals and your vision. Know what it s that you have to measure. Figure out your 5 – 10 KPIs, whatever that looks like for you.

Think from the end understanding that that’s what you’ll need to be measuring, and know what type of data you need to be measuring to keep up with that.

This is quite practical and very inexpensive. There is software that can be used for this purpose and some are even customizable.

Ignoring accounting and sales

I understand that you’re the visionary, and your speciality is marketing amongst other things and quite frankly, your head shuts down when it comes finances.

The general process of a start-up regarding finances is: Get a bank account, pay the bills, make use of an accounting program like Quickbooks or the like, get a bookkeeper and they’ll give us our financials at the end of the year and we’re good to go!

The challenge with that is you cannot grow, manage, make decisions with that being your only source of information on the financial side. Yes, you can start with hiring a bookkeeper and getting your financial statements at least every quarter.

However you want to start getting financial statements every month, eventually. Even if you don’t fully understand them at first, just make it a priority to get them.

Look at them, question them, and make sure they’re accurate and that is a huge starting point because that could help you figure out if there are operational mismanagements that you otherwise wouldn’t have been aware of

Start getting to a place where you use the financials as a focal point, a reference; to know what’s going on in your company. If your accounting person can’t explain them to you then that’s a good indication that you’ve outgrown that person. Start looking for another accountant that can teach you so that you can understand how to use these the right way.

Not taking the necessary steps to prevent fraud

 In order for fraud to occur, the following 3 things have to be present:

  • Motivational pressure: This is personal; something that is going on in their world that you have no control over.
  • Justification: They may think that they are entitled to it or that they will pay it back, or anything thing that rationalises their decision.
  • Opportunity: This is where you want to focus on; this is something that you can control.

Some things to keep in mind in the prevention:

  • The payroll, as well as the person, is in charge of that department. The moment you have 1 person in charge of that entire process, it opens up a huge window of opportunity for fraud

If they can see who earns more than thy do, or the like it can incite them to wrong doing

As an owner, you should be on the side of approving the changes to the payroll (HR side; promotions, hires, etc)

Don’t allow someone to sign your name for you on anything.

You cannot be passive about anything, whether it is a Fedex package or box of chocolate. Don’t do it, this creates a toxic environment.

You don’t want to just rely on trust. It is better to not allow anyone to do it. Doing that opens a whole world to them to something that they would’ve never even considered. And now you’re liable to that.

And when they see cheques lying around and start thinking they can sign for you, therein lies the problem. Because it goes back to the motivational pressure, the rationalisation, and the opportunity.

You don’t know what people deal with in their personal lives. It could have anything; debt, medical problems and that turns normal people into monsters in a heartbeat

Make a habit of checking in on that stuff once in awhile. Have your accountant send you a list for new people that are being paid. Ask questions about why they’re being paid, how they were hired, etc.

Not having enough integrity in the foundation of a business

From the very first day of business, treat it as though you’re going to be selling it. Treat your company like you’re actually going to be evaluated.

Ensuring you have the signed contracts, in the beginning, can be a tedious task and it can be delayed but strive to have that as a standard of doing business. Avoid trading contracts for trust, rather establish those procedures as for how you do business.

Some contracts can be as simple as sending an email as a follow-up to the conversation, outlining the points the parties agreed on, that is how profit will be calculated, on which days the payouts will be and the rest.

Although one is advised to consult an attorney about the specifics, in litigation these emails do carry weight.

Losing sight of your vision

The daily grind can wear you out and you can kind of forget what you’re going after. This may be trying to get funds, trying to find more people for your team, or whatever it is that you’re focused on.

Make it a habit to intentionally keep it on top of your mind to always stay on track. Companies that usually do 8-10 million in revenue often feel kind of lost about what to do next. Going back to what everyone was initially aiming for shows the lack of diligence in keeping the vision.

You may be wondering, how this relates to finances… Vision is what drives a financial model. If someone in finance is compiling a budget or financial projections, they have no idea how to go about it until they know what you’re ultimately aiming for

When you’re working in a team it can be difficult to figure out what the right decision is, and that’s where you can go back and refocus on the vision and work your way back from that. Understanding which vision is more in line with the vision is what makes all the difference in your decision-making.

Once a month you can check in on everyone’s progress and whether or not a specific department is still on track. When the founders lose track of the vision, it seeps into the company culture and that can cause disconnection.

The rest of the company doesn’t know, they are just relying on your leadership. So if you start to lose sight of your vision, there’ll be that disconnect across the whole culture which will disrupt everything.

Founders not taking care of themselves

The hustle and the bustle of going and repeatedly getting knocked off, getting back on track builds up stress over time.

If you don’t take care of yourself, remain centred and calm when making decisions; you’ll drive the company growth down by making decisions purely based on your overwhelmed state of mind and that stressful place.

With the relationships you have, the challenges you face, the different personalities you encounter, investors and their expectations – If you’re not in alignment with yourself, everything will be out of alignment.

Whatever that looks like for you personally, be it: Morning routines, sleep, diet, exercise, relationships, or all of it. Start to have a plan where all of those other areas of your life are integrated.

Something as simple as setting a reminder to send an, “I love  you,” text to your mum. It’s about doing the things that make you realise that there’s actual life beyond getting this huge thing going. Because what you’re aiming for that will always be a moving target anyway

In order to focus, you must create an environment that removes the things hat keep you distracted. It’s in removing and not, trying hard to focus and concentrate on something. By taking care of yourself, dealing with those personal stressors, you allow yourself enough room to show up, focus and be creative.

When you’re putting in a lot of hours, and you end up with fewer hours of sleep – you’re less focused. It’s about manageable stress as opposed to no stress at all, as this is impossible in the life of an entrepreneur.

Only you can understand what your body is telling you that you need. When you’re cranking out all this work, in all these hours, you don’t have the time to listen to what your body is telling you it needs.

Resources Mentioned

Quickbooks

Facebook: Molly Montgomery

Instagram: Molly Montgomery

Twitter: @Mollym_CPA

Company: Ascension

Thanks for listening!

Put in the time and effort required to understand the details and the somewhat fine print otherwise you put that dream; your business, in a dangerous  place.

Have you perhaps made any of the mistakes mentioned above? We’d like to hear about your experience in the comments below!

If you have any questions for Molly, be sure to write them in the comments as well and she’ll answer them!

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