Monday, April 25, 2011

Lesson #8: Leadership Defines Your Business

“Leadership is defined by results, not attributes” – Peter Drucker

Let’s begin with this statement: Leadership is the ability to be independent through a measurable support system. It is the understanding that your business does not succeed without internal and external controls. Leadership isn’t about managing first; it is about creating a vision and building the mechanism so that the vision can be successfully carried out by yourself and people who share your vision.  

For most entrepreneurs, leadership is a role that seems somewhere down the road when you have employees. We tend to mix up leadership with management. The practice of leadership needs to happen before you open your doors because your mindset should be about two main areas: leadership within your industry and leadership of your operations. Too often, many new small business owners go into their launch skilled around their end product without regard for the bigger picture of what the company will look like in ten years. When you give the proper perspective to your business, you will view the future as a key component of your immediate priorities. The clearer the vision, the easier to describe it.

Management Versus Leadership
Management, on the other hand, is about managing the work necessary to carry out the vision. There isn’t much visioneering about management. Peter Drucker defined the difference between management and leadership: “Management is doing things right. Leadership is doing the right things.” Management is specific to managing your business on various levels. In fact, it might be detrimental for managers to practice visioneering while managing. It should be made clear that the vision is either the sole responsibility of you as the owner or with your leadership in a group strategy/vision session(s) as your business grows. Management means defining and systematizing your needs in order to carry out your vision.

Leadership is your ability to grow the company internally and externally through your vision and essential details of what your business will look like in a decade’s time. Leadership is the difference between being self employed versus being self independent. It is this leadership that will provide the mechanisms to grow your company to the point where others are happily attaining the goals you’ve established. As a leaders, don’t forget this concept: “You are either working on your GPS or you are working on someone else’s GPS.”

The Big Question: How Does One Become a Leader?
If you were to study the young lives of such leaders as Martin Luther King, Bill Gates, Barack Obama and John Wooden, you would never have guessed that they would turn out as they have. What led to their rise as leaders was the passion and commitment they made to their work. They were not born with anything out of the ordinary. But they were able to discover the world through the acquisition of knowledge that sparked an interest, an interest so profound that it would lead to their legendary rise. It is a long process of maturation, not a genetic gift. And that might be the most important lesson of leadership: it’s a marathon of “deliberate practice” that runs on an endless road. For many people who have excelled in their leadership capacity, it was their passion that served as their lifelong partner.

And where did this passion come from? In many cases, it was the encouragement of a grade school teacher, a parent or even an acquaintance who happen to see something being performed well. In most cases it was something just above the ordinary, but it was this voice of encouragement that sparked an interest which planted a seed of pride and accomplishment. Studies into the origins of performance excellence always indicate that when a child is identified with an interest in a field, the ability of the parent or guardian to encourage that child is critical in his/her development. Knowing the guidelines for deliberate practice make it more organized and “scientific” if you will. However, the role of how parents should implement deliberate practice has never been studied. Anders Ericsson, the pioneer in deliberate practice, confesses that scientists are far from getting the exact answers to how parents should fit into their child’s development. But, he warns, “Push children too hard and they respond with anger.” He believes that parents must learn to help their children grow with a greater sense of independence so that they will choose to participate in their activity. “It’s how you as a parent can make individuals feel freed to reach these levels and aware that this is going to be a long process.”

Too Old?
But what if you’re already an adult and you’ve made the decision to excel in a field of your choice? The ideals of entrepreneurship fully embrace the dawning of adults into their passionate pursuits. In one obvious way, an adult who develops into a “prodigy” may simply require less time than a child because some experiences accumulated over a lifetime can be “credited” as time spent in deliberate practice. The very idea that most new entrepreneurs begin their businesses after the age of 50 should attest to the shortened learning curve and the willingness to move forward. AARP magazine noted that in 2008, over one million new businesses in the United States were started by those over 50, making it the largest segment of the population to enter entrepreneurship.

But younger adults have also built “credit” through their education, experiences and expanding worldly understanding especially with the information available on the Internet. While it might still be difficult for some adults to identify their passion in the beginning, it nevertheless, becomes a desirable outcome to pursue. As with any deliberate practice, we understand that nothing comes in a flash but works itself slowly over a long period of time with specific training that hones the specialized skills necessary to achieve greatness. The key ingredient is commitment.

Charisma is a Reversed Concept
Often times, we hear about “charismatic” leaders as if you need to be charismatic in order to be a leader. Because many leaders gained success and notoriety, we tend to attribute that - at least partially - to their charisma.  Instead, it’s the other way around: they became charismatic when they became leaders; not in their eyes but ours. They remained oblivious as they forged ahead with tenacious drive, and we placed them on a pedestal in admiration of their accomplishment. That’s what we took for charisma. 

Let’s broaden the definition of charisma. Charisma does not necessarily mean a leader with a commanding presence. What we tend to see most often are well-spoken charismatic leaders but not so often, are those who lead with less fanfare and yet, have as much impact. Without a doubt, charismatic leaders with the gift of gab, draw the most attention and make for great sound bites. We are emotionally drawn to their passionate ability to get their message across. But Bill Gates rarely speaks with emotional content yet his leadership was one of the most profound influences in the computer industry. 

Same could be said for Calvin Coolidge, a Republican, whose lack of verbal charisma still won him the presidency in 1923. He was known more for his “distinguished” leadership and ability to “restore the dignity and prestige of presidency,” as Democratic Alfred Smith said at the time.  There is a story about Coolidge’s infamous verbal shortfall that shows that a message can be delivered effectively without the need for a powerful presence. After he became president, an inaugural party with members of Congress was held. On a bet, a senator came up to Coolidge and said, “My friend over there bet me that I can’t make you say three words.” Coolidge replied, “You lose.”

Your Passions Will Grow
So don’t confuse your lack of charisma as a weakness. Instead get to the thing that makes your heart flutter with excitement and engages your mind as if time stood still. Then, work like hell, and it may be so engaging you won’t notice how hard it is. One of the things that will happen is that as you become an expert, your desire to express your new knowledge finds an enthused voice. 

As more people who desire your company’s offerings find out about you, they seek your expertise, and you naturally find opportunities to speak. And the more often you practice your lines, the finer you are able to deliver your message. (Martin Luther King’s “I Have A Dream” speech had been recited dozens of times before his most famous rendition in Washington D.C.) For many, the passion can’t be restrained and the flow of words comes out in colorful imageries. That’s when others begin to see you as a charismatic leader. When the dust settles, you too may be standing on that pedestal without knowing it.

Self Employment Isn’t Self Independence or a Factor of Leadership
Self employment is you doing all the work yourself and working 12 hours a day. Self independence is organizing your business so that it can function efficiently with or without you while you continue to reap the benefits. This doesn’t mean you aren’t working anymore. It means you’re still required to work but it also means you’ve established systems that keep you organized and in control – something that many self-employed entrepreneurs seem to lack. (If you want evidence, read “Outliers – The Story of Success” by Malcolm Gladwell, Little, Brown Publishers, 2008 and “Tribes” by Seth Godin, Penguin Group, 2008.)

Leadership means bucking the status quo and understanding that change is inevitable and desirable because improvements are a necessary part of your business. Constant social and economic changes will happen and your role as company owner is to anticipate and take control of your future. Social trends and technological breakthroughs will either have a detrimental or positive effect on your business and it will be your job to take advantage of each change. With or without you, change will happen so always look to it as a positive step forward. When you take that attitude, you are leading not following. Leaders know this and look forward to opportunities that will come about.

Take Time to Sharpen Your Saw
Remember, your best tools for utilizing change are the information you gather from the various sources that will have an impact on your business. By staying atop what is happening, you will remain a step ahead of your competition. Let’s face it: it takes work to keep a competitive edge and the majority of small business owners conduct information gathering and skills upgrade as if it’s a burden. Some don’t even bother. Instead, you should look upon this necessity as “sharpening the saw” as Stephen Covey calls it in “Seven Habits of Highly Effective People” Simon and Schuster, 1989. It is your opportunity – your responsibility – to improve your skills and to improve the offerings of your company. It must become a key component of your company’s culture. If you love what you do, seeking information should feel like being a kid again running rampant in a candy store without any big people bossing you around!

As a leader, you’ll also be up against many people who author Seth Godin calls “sheepwalkers” in “Tribes,” (one of Business Week’s Top Ten books of 2008).  He defines them as “people who have been raised to be obedient and giving them brain-dead jobs and enough fear to keep them in line.” They and their compatriots will fight you even when they’re losing their jobs to outsourcing, cheaper labor and automation – fighting the changes that result from our global economy.

Everything Has Already Been Invented
A classic story of a sheepwalkers is that of the director of the US Patent Office who in 1899 said that his office was no longer necessary because everything that man would invent has already been invented! Had we lazily sheepwalked to his way of thinking, we’d still be using typewriters and slicing our own bread. Unfortunately, that way of thinking still exists where many people are so use to the way they live and work that they are unwilling to change, even for the better. It’s of the same syndrome as the battered wife who refuses to leave her abusive husband because at least she knows what lies ahead rather than getting a divorce. Her mental world has shrunk into a cubicle to the point that she fears moving outward into the unknown. It goes without saying: “no knowledge, no future.”

You’ll find that sheepwalkers and their allies make up the majority and so your role as a leader will be as a minority challenger who is characterized as a black sheep to the status quo. Godin makes the case that leaders must be of the mindset that they are underdogs: “That’s because leaders work to change things and the people who are winning rarely do.” It’s the honky dories versus the underdogs! 

But in order to succeed as underdogs, we need to get our message out there, get people to learn about our passion, and in our case, our entrepreneurial passions. The idea would be to find people who support you and want your stuff too. Even better is if they share the same passion and are looking for a leader (or business owner) who’ll help them find their own nirvana. This doesn’t mean just talking about it or sending off emails to all your friends and family. It requires a campaign, a “micro-movement” as Godin calls it. Imagine applying these ideas to your marketing research and the design of your company’s culture.

Godin says a micro-movement requires five things-to-do and six principles in order to be effective:
Things To Do:
  1. Publish a manifesto. Get it out there and make it easy for others to see. It doesn’t have to be written or printed. It can be a motto or a graphical representation. “It unites your tribe and gives them a structure.” In your business, this might be simplicity in message so that your clients get it right away.
  2. Make it easy for your followers to connect with you. Make it so visiting you, emailing you is a snap. And given your clients’ technical savvy, it might be an interactive process on a blog, Facebook, MySpace, LinkedIn, etc.
  3. Make it easy for your followers to connect with one another. Consider that in your company or prior to your financial ability to hire others, there will be a need to unite those who believe in your business and need to gather in order to go forward. Give them plenty of opportunities to connect because the more they connect, the better their understanding of each other, their common goals and their ability to work together.
  4. Realize that money is not the point of a movement. If you believe that your business has an end result of financial intentions, then the movement is no longer a movement. Money enables the movement, not the other way around. At the point money becomes the dominant figure, there is no point to your movement. 
  5. Track your progress. This provides a method for you and your compatriots to see where you’ve been and where you’re heading. It provides a method for everyone to contribute to your on-going progress.

  1. Transparency really is your only option. Keeping everything above board and in the open gives everyone a sense of trust and improves their engagement.
  2. Your movement needs to be bigger than you. So often, successful people talk about how what they do isn’t as important as the end result.
  3. Movements that grow, thrive. And in order to grow, one needs to innovative, get better and more meaningful to those that matter in the movement. It reinforces the very existence of the movement.
  4. Movements are made most clear when compared to the status quo or to movements that work to push the other direction. What is the impact on the greater society that your movement has and aligning your movement with similar movements strengthens your common cause.
  5. Exclude outsiders. Identifying who doesn’t belong to your movement provides a way for you to understand who should be in your movement.
  6. Tearing others down is never a helpful to a movement as building your followers up. One of the worst things you can do in a movement or business is to disparage your competition with negativity. The message then becomes negative altogether. 

Leaders As Servants
When we speak of leadership, our youthful image might be of a boss who dictates everything and says, “It’s my way or the highway.” Granted, companies require a set of rules that all employees are guided by including your one-person operation, but is it not possible to get the same results (if not better results) by doing three things: 1) drawing up the vision of where you see your company going and getting people excited about it, 2) allowing openness, creativity and people’s desire to succeed as the company culture and 3) devoting your company’s mantra as leading through service to others? What, you say, does it mean “service to others?” As a leader, are you not suppose to take on the role of being served by others?

To get the quick and dirty answer to that question, you might want to refer to the “21 Lessons of Successful Entrepreneurs” and read over Chunk #3. The role of leadership is one of the most important questions you should be asking yourself when you’re considering your business philosophy. As Benjamin Disraeli, British Prime Minister (1804 -1881) said: “I must follow the people. Am I not their leader?”

Perhaps no time in our modern history has the role of business leadership become scrutinized so much: first by the baby boomers of the Sixties who saw the relationships that business developed in the Vietnam War - of the massive “military-industrial complex” and its death-in-profits war machine. Later in the 1980s, as many of our major companies closed down their factories and outsourced their manufacturing, leaving millions unemployed. And today, as our financial and economic systems collapse into the worst recession since the Great Depression, brought on by the greed and unregulated transactions of our biggest financial institutions. If our business leaders can operate with such callous disregard for the rest of us, why trust leadership when it has led to many horrific results? How is it possible that business executives on Wall Street gave themselves over $18 billion in bonuses for 2008 when their companies were going under and millions of investors were losing their life savings?

Changing Our Concepts of Leadership
These and other episodes have brought about a shift in the way many people consider leadership, especially leadership that hides its mistakes and refuses responsibilities of its failings. Many Americans including the new rise in entrepreneurs have redefined their own paradigms of leadership to mean more social responsibility and personal enrichment. We have decided in greater droves that working for ourselves is a better form of leadership than working under “traditional” forms of leadership that seem too corrupt and too arrogant for our tastes.

In the Urban FIRE concepts, leadership serves the people it affects the most: its employees, its customers and the community in which it resides. It does so by creating products and services that enhance our lives while providing a livelihood that allows us to continue improving our offering. We also define leadership as your ability to make your new enterprise stand out amongst its many competitors and not merely exist as another new company. The combination of the two roles are critical ingredients in first distinguishing your business, second, in stabilizing its existence and third, in giving it longevity and financial security.

We Are Members of Our Communities
One word about community in our last paragraph: don’t ignore it (which most companies do in real terms – that is, lots of talk and little action but always around for photo ops). By ignoring community, we give no appreciation to our ability to exist as a company. And if you think about what makes for a successful company, it is in solving problems, in building partnerships with clients and vendors and formulating creative innovations that launch new paradigms. All of these factors would not happen unless we had not listened and served those around us. Why then would leadership not believe in the consistency of this interconnectivity? That takes our new definition of leadership.

We should realize too that our very existence as leaders and our ability to start a business is a matter of privilege and choice. For this we need to believe in the importance of gratitude in how we conduct ourselves. The brashness and egomaniacal legends of the Donald Trumps are great television and gossip, but they do nothing to serve our purposes in starting a business or in succeeding through an imitation of their character.

Defining Leadership
Let’s take the essence of leadership and give it a practical definition. According to the Merriam Webster Dictionary: to lead means “to direct on a course; to direct the operations, activity or performance of; to tend towards a definite result.”  Again, notice that it doesn’t say “manage.” It means that you as a leader of your new enterprise must have a purpose in taking charge of going forward. It also means having the knowledge to lead this charge even if it’s just directing you. In other words, leadership should begin with a plan, a business plan, to show where you want to take your company.

As we said earlier, leaders are made, not born. Leaders arise out of a passion to change and improve something and the powerful desire for continuous knowledge to make it happen – the ability to grasp information and put it into practical use. If you can’t do that, then you can’t lead. Actually, most great leaders all worked for someone, learning the ropes and understanding how great leaders conducted themselves. So if you’re young, the odds are your leadership skills will be lacking. This, however, doesn’t mean you shouldn’t start a company; it does means you’ll have to acknowledge your lack of knowledge and experience and take up extra duty studying the mechanisms of leadership. So why not work under someone as an apprentice, as a junior executive, as a mailroom clerk – all in the effort to gain the experience and knowledge? You can be in training while you’re setting up your business. All great leaders had others who they looked up to and learned from. They included mentors and senior business associates. And when a physical person wasn’t available, they relied on email correspondence and sometime through biographies and autobiographies.

My Life Flashed Before Me
In my own situation, I was determined from a young age to run my own business. Getting fired from your first five jobs will do that. As I progress into college, the thought of graduating, working 40-hour work weeks, getting two weeks vacation, retiring at 65 and then dropping dead seemed a waste of a good life. So I self-taught myself just enough skills and ventured into business without a clue as to what I was doing. It was, however, exciting, chaotic and a great deal of work – mostly correcting my mistakes.

It didn’t take me long to realize that I needed more information to do this entrepreneurship thing but I dreaded the very idea of returning to school for business – a subject that seemed both boring and difficult. Instead I decided my best course of action was to work for companies that offered me a chance to learn just by immersing myself. Later, however, I realized that studying entrepreneurship through research, mentors, biographers and experience were necessary components of the broader picture.

Learning By Doing
So to make a long story short my business education during my 20s was all hands. I targeted small companies because I figured small companies offered me more flexibility, working in several departments rather than one. I never thought about whether some chore was in my “job description” because if it offered me an opportunity to gain an entrepreneurial skill, I’d do it. Of course there were lots of things I didn’t want to do but that came with the territory (such as counting inventory – torture!) but I learned the importance of inventory control and how your money gets stuck in products rather than available cash to grow your business.

The idea wasn’t to establish myself in any one company, it was to learn and move on because my true goal was learning and creating the company that would have my signature on it and provide me with joy, contentment and maybe a few girlfriends. I worked for three companies during that time and with each, I learned, took my lumps but always kept notes on what I considered were the key factors of a successful company. With each successive company, I also rose in responsibility and gained even greater insights to the making of a sustainable, if not great, company.

The Fallacy of Leadership Traits
And what about all those leaders who we think of as geniuses and brilliant innovators? To burst your bubble, here’s a list of what corporate headhunters say are the top traits of leadership. In “Talent Is Overrated,” author Geoffrey Colvin, Penguin Book Publishers, 2008, shows that top corporations are looking for isn’t brainiacs but those with the following characteristics:
  • A clear thinker
  • Imaginative
  • Inclusive leader
  • Externally focused
  • A confident expert

Jack Welch, the legendary former leader of General Electric had the Four “E’s of leadership:
  • Energy
  • Ability to energize
  • Edge (meaning decisiveness)
  • Ability to execute

Seth Godin’s “The Elements of Leadership” from “Tribes.”  
  • Leaders challenge the status quo.
  • Leaders create a culture around their goal and involve others in that culture.
  • Leaders have an extraordinary amount of curiosity about the world they’re trying to change.
  • Leaders use charisma (in a variety of forms) to attract and motivate followers.
  • Leaders communicate their vision of the future.
  • Leaders commit to a vision and make decisions based on that commitment.
  • Leaders connect their followers to one another.

The above are lists of behaviors not birth traits. By understanding what is necessary, it is highly possible for anyone to gather these behaviors through deliberate practice – repeating the practices until it becomes second nature. It won’t happen in a month but repetition will eventually prove itself.

One other important rule about leadership: you never, ever stop learning to be a leader. Think how many times, our society has changed; how we used typewriters in the 1970s and all of a sudden in the 80s, we converted to computers. How about the implementation of fax machines, cell phones, the wireless transmitters, high definition TV, Internet dating, hybrid cars, the global marketplace and online communities and blogs? These are change agents that need to be reckoned with and utilized as we mature as leaders.

Domain Knowledge
One of the most important areas for leaders and business owners to learn is called “Domain Knowledge.” While we have no problem learning and growing passionate about the product or service we sell, there is little emphasis on understanding all the other aspects of running a business. In fact there is little explicit education with on-the-job training or in school to teach these skills. Seems extremely dumb not to provide this level of education but most people assume you’ll learn it as you build your company. Yes, you will through trial and error but wouldn’t it be great if you could – at least – learn the fundamentals before you step into the real world? How does your business work?

Just so we’re clear, if “domain knowledge” isn’t available, here’s the areas you need to consider:
  • Company internal structure and operations
  • The particulars of your industry (join an industry association)
  • Financial relationships (banking or investor relations)
  • Tracking your financials (get QuickBooks and learn it – it’s easy!)
  • Employment policies and regulations
The Importance of Structured Knowledge
Geoffrey Colvin’s “Talent is Overrated” has this to say about domain knowledge:
“Imagine the difference if you made domain knowledge a direct objective rather than a byproduct of work. If you set a goal of becoming an expert on your business, you would immediately start doing all kinds of things you don’t do now. You would study the history of the business, identify today’s leading experts, read everything you could find, interview people inside your organization and outside it who could provide new perspectives, track key statistics and trends. . . . With time, your knowledge advantage over others would become large.”

The advantage you now achieve is a superior understanding of what creates profits and avoids losses for your business. But it goes beyond just financials because it also provides a huge database in your head that allows you to make more intelligent decisions for your company. Colvin calls it a “mental model” which contributes in three ways:
  1. A mental model forms the framework on which you hang your growing knowledge of your domain
  2. A mental model helps you distinguish relevant information from irrelevant information.
  3. A mental model enables you to project what will happen next.
Leadership is a set of acquired skills. As much as we’ve discussed the various aspects of leadership, your ability to gain it is based on two questions:
  1. Are you willing to attack whatever it takes to achieve it?
  2. Do you believe that if you put in all the hours, all the training, all the studying, you will actually gain a level of performance that will distinguish you above others?
Do You Truly Believe You Can Succeed?
So it comes down to an internal passion that requires an environment of positive motivation. It means that there will be many failures but that your environment and ultimately, you, are determined to achieving greatness. The second question is a matter of confidence, not artificial confidence that most people attempt to engage by trying to convince themselves. It is a deep rooted belief that probably comes from childhood or early work experiences. Do you really believe you can succeed or do you believe that even if you worked hard at attaining these skills, you’d fall short – perhaps relating to a condition that happened in the past. If you’re honest and cite the second half of the above sentence, then you won’t do the work necessary. You aren’t mentally ready yet. As Henry Ford quipped: “If you think you can, you will. If you think you can’t, you won’t.”

So face it: there is no reason why you can’t lead. It’s tough, it’ll probably exhaust you and mentally tax you, but the solution is in front of us because all the research on human performance and leadership during the past 30 years has built enough evidence to structure a course of action that anyone can use to gain success. It begins with this fact: all great success stories met with great difficulties along the way. 

You have two choices when you come upon a roadblock: 1. turn around and go home or 2. figure out a way to punch through it. If you make the first choice, you’ll do no better than the majority of people. If you take the second, your intelligence will gain confidence, exponentially growing and expanding your abilities. That’s why there are so few leaders and so many people who are looking for leaders to follow. No one succeeds without the willingness to fall down and feel the pain. Those battle scars emerge as our badge of courage, our windows of experience and the best lessons of our lives.

People Will Laugh At You
Anyone can do this. You’ll fail, people will laugh at you, you might look foolish and you might cry and scream but each entrepreneurial episode will be a test and a way for your brain to take in the lessons. In the book, “How We Decide,” author Jonah Lehrer, MHM Publishing, 2009, chronicles the latest research on training our brains to increase our abilities. Through new imaging technologies, scientists have witnessed how the brain learns. The greatest discovery was how activities in which failure occurred also provided the brain with the most productive learning experience. When failure was not in the equation, the lesson was not as impactful.  

The decision is up to you. There are no reasons you cannot be a leader if you’re determined to build a sustainable future. It just requires your commitment to make it a conscientious component of your entrepreneurial life from this moment on. As Walt Disney would tell you: “The way to get started is to quit talking and begin doing” which appears universal in the broadest sense. And as Yoda said in Star Wars from a galaxy far, far away: “there is only doing.”    

To be continued by you.

Thursday, April 21, 2011

Lesson #9: Securing the Right Financial Concepts, Part 2

Bankers probably won’t like what I’m about to tell you nor will many entrepreneurs but here it goes: When you start a business, don’t go into debt; start with exactly the amount of money you have right now. Adjust your business concept so that it takes advantage of your present financial means. In many cases, this probably means starting really small. An advantage? You betcha! Because when you lack capital, you got to get down . . . and dirty! What you lack in money, you’ll make up in sweat equity, more planning, information gathering, and force you to utilize more of your creativity. It will make you a superior entrepreneur down the road. And those brain cells will go into overload on ideas and solutions.

There are few entrepreneurship training programs that hold this concept, but I’ve launched a number of companies and each one was based on this simple formula:
  1. Build a client base first (by using guerilla marketing techniques and a client-centric culture)
  2. Save a portion of your profits first and build equity (to take advantage of future business)
  3. Slowly grow the company using the equity (for continuous marketing and innovation)
Debt Sucks
I was never in debt for greater than $100,000 and that was short term. At the time, my company was closing in on $5 million gross annual sales. What I’m about to explain to you about financial planning is no different than what many financial experts will tell you on an individual basis: don’t spend what you don’t have. (There is one exception to that rule and that’s if you have a signed contract to provide your product/service to a qualified client for which you need capital in order to fulfill.) It makes life more challenging but it also keeps you out of debt, and debt for many people can degenerate into panic attacks and suck the life out of them when they’re having trouble making the payments. Your success may take longer, but it’ll definitely be more rewarding and less costly, financially and personally.

Organically, you’ll turn into a business guerilla, attacking with imagination and getting out into the marketplace to offer your product/service because you need the damn money! You won’t get your money problem resolved, but you’ll be thinking about it and planning for it. But all that thinking, planning, training, information gathering, going after clients - all that hard work in lieu of money, will begin to show dividends because you’ve kept your expenses low.

The Purpose of Business
Here’s what Peter Drucker, the father of modern-day management had to say about expenses within the content of a broader statement on business: “Because its purpose is to create a customer, your business has two purposes: marketing and innovation. Marketing and innovation make you money, generate sales and produce profits. Everything else is an expense.”

Jim Collins, the best-selling business researcher and author of Good to Great (2001), stated: “Disciplined people who engage in discipline thought take disciplined action. This framework captures much of what separates greatness from mediocrity.” Nowhere do you see anything about money; it’s attitude and creativity.

As you stabilize your business, your perspective on money will be the right one because you never have money to skip steps. You couldn’t pay an outside consultant to do your analysis or buy a business plan or pay for a marketing campaign. You couldn’t be lazy because the money wasn’t there to afford any luxuries. You had to do it all. And for that, you know your business, you know the true value of money and the appreciation for your clients is more meaningful than your wealthier competitors.

Money Should Never Lead
The other way to look at money for your business is this: money does not initiate anything. It follows. Money will not make a brilliant idea or a solid business. You do those things with your intelligence and hard work. Money is a tool you use to carry out your existing ideas. It goes where you want it to go. And always use it at your comfort level because the more success you create, the more you’ll get to know Mr. Money. While your comfort level now may be $5,000, in five years, your comfort level may well be $500,000 because both you and Mr. Money have grown together.

And another cool trick that you need to implement as your business grows: don’t wait until you need a loan; anticipate your financial requirements using a realistic projection analysis. This should never be a pie-in-the-sky analysis showing growth at a factor of 10 when you’re trying to impress your banker. She knows better than that based on your past history. It should be a truly realistic projection that makes sense to you and your company. It might be ten percent or less. And in that case, consider applying for a business line of credit or a “microloan” available through a new breed of community loan companies. Do so months ahead so that when it’s time to borrow, you’re not scrambling and panicking for money. Be comfortable with the payment amounts you’ll be making each month. Finally, it’s a whole lot easier to stay in business when you don’t owe any debts. To give you an example of operating with minimal capital, here’s two of my experience from way back in the mid-80s.

Lots of Fish in a Little Pond
When I started a technology business back in 1985, I looked up the number of competitors in the yellow pages. There were 24 in San Francisco doing just about what my little company was doing. They ranged in size from the dinky one-person shop to the Fortune 500 subsidiaries. The bigger the company, the bigger their budgets and the fancier their offices. They had equipment and salaries that were way out of my price range.

So it forced me to think differently and more creatively in order to survive. It also made me work harder to get our name out to our clients. And sure enough, what I discovered was that many large companies did little to attract clients, thinking that the clients should already know them. They rode their glorified reputations, their glossy Madison Ave brochures, and fancy-pants sales people, but there’s something insincere about that approach especially when the client calls and finds out their contact quit two weeks ago.

On the flip side were the little guys, mainly made up of decent technicians who were really good at what they did but never studied business, sales, or marketing. They too sat around waiting for the phone to ring. So I was neither—couldn’t stand the phony, insincere large corporation and wasn’t quite anal enough to be a technician. Instead, I thought of myself as an urban guerrilla, an underdog, disguised as a mild-mannered business person moving tactically amongst the small business jungles of downtown San Francisco.

On the Cheap
Given my perception of my competitors, I decided the best and least expensive way for my company to gain business was stomp the pavement, go into the largest buildings, and start jotting down company names. (I thought about this strategy as an economy of scale—large building contained lots of companies and, if we could capture numerous clients in each of these big buildings, then it would be immensely more efficient and a lot cheaper for my technicians to park once and service multiple clients just by riding the elevators rather than driving and parking umpteen times.) I then ordered a reverse phone directory from PacBell (AT&T) which gave out the names and phone numbers of the addresses I visited.

You might think that there are better ways to contact potential clients these days, say like through LinkedIn, Facebook, and Twitter, but I still like the notion of talking to people face-to-face or by phone. There’s an emotional attachment that we all get by interacting with each other, although websites like provide an initial introduction that can then be parlayed with a phone call. Check it out. Given that your best business strategy will be through word-of-mouth recommendations, you should always make it a priority to go face-to-face because that emotional connection coupled with excellence in your service will build your reputation and increase the odds for paying customers.

The Paper Clip Game
Back in the old days when the phone was the main means of communications, I played a game called “100 Paper Clips.” Each day, I would place those paper clips on the right side of my desk. I would then call all the companies I wrote down earlier and gave them my best sales pitch. In the beginning, I was downright lousy but I’d go through 100 phone numbers each day and, as I made each call, I would take one paper clip from the right side and move it over to the left side. When I had emptied out the right side, I called it a day—that is, in making sales calls. What this little game did was take away the apprehension of making cold calls. It was a game and the emotional rejections gave me an eagerness to make the next call, quickly assess what didn’t work and optimism for the next call.

Talk about experience teaching us! After a few weeks of making these calls, I increased the response rate to my calls. From nine or ten respondents out of a hundred requesting information, I was able to raise that rate to 60 out of a 100 in about six weeks just because the more I made those calls, the more I learned what worked. I became more confident, I relaxed and I began to understand who should make up our ideal targeted client. With each positive response, I would do a follow-up call and make sure my potential client received the information, and it provided me with another opportunity to learn more about them.

Here’s a critical lesson I learned from the thousands of calls I made: you don’t need to blab much about the wonders of your company – whether by phone, by social media, website or in person - because the calls aren’t really about your company. It’s about learning who’s on the other end. You need to make a simple, short statement about what you provide, followed by asking questions about their company and then listen.

Listening to what your prospects are saying is the most important segment of your interaction. There’s an art to hearing and taking in the tones of key words as well as the words being used. By listening, you can actually adjust your tone so that it becomes more comfortable for the person on the other end. When that happens, you are building the first level of trust and putting one foot forward towards a meaningful relationship. If this sounds like the Platinum Rule, you’re right: “Treat others as they want to be treated.”

Better Than Cold Calls
From those simple calls, we were booking about 20 to 30 new clients from the 60 who expressed an interest. At one point, we were taking in over 500 new clients a month. And 20 percent of them were businesses I hadn’t contacted before; they were referrals. So, I concluded that being client centric and giving them the solution they needed, not only made them loyal, it made them an enthusiastic arm of our marketing regatta. (But a danger you’ll want to avoid at all cost is to not forget about your loyal clients. Many businesses tend to pay less attention to their loyal clients thinking they’re “in the bag” and needing no additional tender loving care. Not only will you lose their business, they’ll spread nasty things about you and your company just because they’ll feel like the neglected wallflower that you brought to the senior prom and abandoned.) There is a rule about bad reviews called the “Law of 250” which says that when someone has a bad experience with your business, 250 people will know about it through word-of-mouth.

In the meantime, my competitors were still waiting for the phone to ring. Three years later, of my 24 competitors, only three others remained. The moral of the story is that it doesn’t take money to win over clients; it takes three simple, cheap tactics:
  1. A well-honed message followed by your superb listening skills
  2. Your initiative to go after your prospects like diamonds in the rough
  3. Polishing them with tender loving care and assuring your TLC is constant
 Names, Names, Names!
In their bestseller Made to Stick (2007), Chip and Dan Health they tell a story about a newspaper publisher named Hoover Adams in North Carolina who has one of the few nationally known local newspapers on the planet—the Dunn Daily Record—that’s thriving. His secret: “Names, Names, Names!” His reporters are required to write stories that feature people in the community rather than events or people unknown to his readership. His rational: there are plenty of newspapers providing state, national, and international news. People in his city can get that information easily, but do any of these other papers include local news and names? People want to see their names, their neighbor’s names, and their friend’s names in local stories. For this publisher, it was that simple because he understood his client base.

Similarly, how many people do you think you could connect within the business world who would appreciate someone interested in them, their work and their company? You already possess what you need to get started, and it ain’t money—it’s the honesty and quality of your business and you.

Some Personal Issues about Money
Going into a business requires a decent knowledge of finance, enough to know whether you’re making money or not. But our understanding of money comes from how it was treated and viewed as we were growing up. I’m going to make an assumption that money is somewhat of a mystery to you because like me, you just never had much of it around when you were young. Nevertheless, we all know how important the role of money plays in our world, so it’s a wonder that we don’t teach it as required curriculum starting in our primary schools. Even if it’s as simple as helping our children start a dinky bank account at an early stage. Giving ownership of that money to kids provides a real world experience that will serve such a valuable lesson as they grow to adulthood.
 I remember in the second grade, we were visited by a representative from the Bank of America. He was this big guy with a bowtie and a gentle demeanor. He gave us our first lesson in financial literacy and encouraged us to start saving now either with a saving account or the now-defunct Christmas Account. I couldn’t afford the monthly deposits for the Christmas account (which was a way to save for Christmas gifts slowly over the year while earning interest) but I had $3.50 to put into a savings account making four percent interest per annum. Man, I was so stoked about growing my money that I would stand in line at the bank on the first of each month along with dozens of retirees to collect my interest! It gave me the incentive to make it grow through chores and entrepreneurial ideas even then because I wanted a baseball glove and later a bike. 

With that bank account, I was able to get both even though it took what I thought was a hellava long time—the glove in the fourth grade and the bike in the fifth grade! But looking back, the most rewarding part of that experience wasn’t buying the glove or the bike; it was in reaching my goals. I’m sure that little $3.50 was the best teacher of my financial literacy I could have had because it was touchable and provided a reward for my diligence.

Never Enough Money?
I know that for most of us, as we grew to adulthood, there never was enough money and as a consequence, we ended up borrowing, thinking that we could make payments in manageable increments. And sometimes, those increments kept growing because we didn’t understand how interest rates worked and how they accumulated on top of our original amount even as we continued to make payments. In the meantime, the bills kept coming, inflation was lowering our buying power and our ignorance about money left us anxiously clueless. For some of us, filing for bankruptcy was our only choice. For others, it came close but knowing the backlash of bankruptcy kept us from filing.

If we’ve experienced this embarrassment directly, we know the detrimental effect it has on us. If we haven’t, we know how devastating it has been to some people, even to the point of suicide. If you couple these scenarios and then watch TV or look through glamour magazine, you get a distorted, inflated image of what money brings and means. The federal guideline for poverty in 2008 is $10,400 annually for a single individual or $200 per week. For a family of four, it’s $21,200 or $100 per person per week. I saw a bumper sticker recently that read: “Fulltime Workers: 64 percent at the poverty level.”

According to the US Census Bureau, the present median income of Americans is $24,325 meaning that half of us are making more than that and half are making less. Given the overly inflated bonuses and salaries of many large corporate executives, that 64 percent who are in poverty may be right on. And according to United for a Fair Economy, a nonprofit financial training and advocacy organization in Boston, MA, more than 80 percent of the American wealth is held by 10 percent of the population—meaning that 90 percent of us own less than 20 percent.

A Messed Up Perception
Money has been given more power than it should and it has wrecked our sense of logic and humanity. How often have you been denied a special medical treatment by your HMO because it’s too expensive and how many stories have you read where the decision-maker for your denial is given a bonus or a raise for how much money he’s saved his company? In the meantime, we suffer through our ailments and in the worst case, we die because money mattered more than our existence. In 2010, the projected cost to each insured individual is now over $10,000. That means medical insurance is collecting an average of $10,000 from each person under their coverage.

This kind of scenario crops up in many other fields as well but its effects hurt us exponentially. Take Big Oil. During 2007 and 2008, Exxon, Gulf, and Chevron-Texaco reported combined record earnings upwards of over $30 billion for a quarter (April-June 2008), the highest profit in American history while many at the poverty level cannot eat nutritious foods because the price of diesel has made many foods too expensive. Instead, we’re heading for the fast-food joints because as greasy and unhealthy as they are, they provide a filling meal (and addicting) even at the expense of making us dangerously overweight and ready for the emergency room—an expense we’ll never be able to pay anyway, adding to our mounting debts and eventual bankruptcy.

Even though Martin Luther King made this speech in 1968 at the Riverside Church, sadly, it holds its truth 40 years later:
. . . We as a nation must undergo a radical revolution of values. We must rapidly begin the shift from a "thing-oriented" society to a "person-oriented" society. When machines and computers, profit motives and property rights, are considered more important than people, the giant triplets of racism, extreme materialism, and militarism are incapable of being conquered... America, the richest, most powerful nation in the world, can well lead the way in this revolution of values.

When You First Start Your Business
Your knowledge of money will completely affect how you start your business. My advice is whatever your relationship to money is now, just go with it, and don’t worry about whether it’s enough. Well, it won’t be, but go with it anyway because you won’t have many alternatives. But as I said earlier, it’ll always be a blessing in disguise: it will be one of your best educations in financial literacy as long as you stay awake during the lesson.

I can’t tell you how many suffering first-year business owners I’ve met who skimmed over their entrepreneurial education, and were under the illusion that money would save their hides when things were tumbling. While too little money and too much money are always cited as two reasons that businesses fail, I would say the underlying root cause is the lack of financial understanding and their over-dependence on money as their savior. Always ask yourself: “who’s controlling the money?” It should be you every time.

Money to Start Your Business
While I don’t want to contradict my philosophy of starting your business with the available cash on hand, I think it’s also important to suggest a few ways to obtain money as you grow as long as you feel comfortable with the repayment criteria.

First and foremost, consider the Small Business Administration as a last resort. For the majority of you, you won’t qualify because 1) you’ll need to build up a track record and 2) you’re way too small for their loans. The current criteria for example require retailers to have an annual income of $3.5 million; for service companies to gross $5 million annually and manufacturing to have 500 employees. Yes, the definition of “small” is in the eye of the blind.

When I applied for their loan, I felt pretty demoralized from the experience. Back then, you also had to have been rejected by two conventional banks in order to apply for an SBA loan. So doesn’t that make an SBA banker take the attitude that you’re already a loser? The questions and attitude of the bankers was overly personal, demeaning and cluttered with unnecessary red tape. It’s a stupid way to encourage small business growth, but one thing I realized is that large banks who participate in the SBA-guaranteed loan program are also the brains who begged to have their money borrowed by foreign governments in the billions only to have those reneged. So who do they take it out on? Yep, the little guys because we’re so readily accessible. But we’re the guys with a much better repayment history than the dictator of some corrupt regime who probably pocketed most of the money into a Swiss bank account or partnered up with a drug lord to harvest heroin for the American market. (If you think I’m exaggerating, read Confessions of an Economic Hitman (Perkins 2006)—if even ten percent of it is true, you’ll get a better picture of our misguided and corrupt lending programs both here and abroad.)

I did finally end up with a SBA loan from a small community bank in Walnut Creek where the banker I was dealing with was much nicer and a great deal more helpful. Unfortunately, the bank eventually sold the loan to a large bank who hired the Evil Witch of the East to hassle all SBA clients to make sure we paid up on time even if we never were delinquent. It got so bad each month that I decided that dealing with such assholes was not part of our business plan. We had enough equity by then that we paid off the remainder of the loan and told the bank to kiss our corporate butts good-by forever.

In his book, Growing Your Business (1987), author Paul Hawkin calls the SBA “one of the strangest institutions known to mankind.” He too had the same experience as I did but goes one step further: the time it takes to get an SBA loan is so long, that by the time you get the funds, it’s probably too late.

Your Best Money Sources
  1. Your best bet is you. It’s the money you’ve saved whether it’s in a cash account or any investments that if you were to lose it, wouldn’t do too much harm. To keep it straight, loan the money to yourself as a sole proprietor or use it to purchase shares in your company as an LLC or corporation. Then deposit it into your business bank account; not your personal bank account. Possible areas of money you have right now are your savings accounts, earnings from your job, retirement fund, life insurance policies (whole life which has an accumulated cash value), lines of credit from your home equity loan and inheritance.
  2. Family and friends are also a decent source but the one thing you must be clear about is the lenders’ relationship to your business. If you do not want their voice or decision-making within your company, create a written agreement for the loan and make it clear that they are making a loan with no powers. You control everything. They either loan you the money on this basis and shut up or no deal. Believe me, there are family members and friends who’ll want a piece of the action when your business starts to fly. Also make sure you detail how you’ll pay back the money either in increments or a one-time payback and whether there is interest built in. Even if it’s your mom and dad or best friend, do the loan papers with the utmost precision as if you’re dealing with a stranger. Money has a way of screwing up even the best of relationships.
  3. Community lending programs offer micro-loans from $500 to $100,000 based on your equity, your company’s equity, and your ability to pay back the loan. In Oakland, there are several agencies including the Oakland Business Development Corporation, Opportunity Fund and Working Assets. (In the pipeline is a proposal by Goldman Sachs (of all people) to develop a microloan program with $300 million distributed through such organizations as those mentioned above.
  4. Community-based banks such as OnePacific and Community Bank of the Bay will work with you to secure either SBA-backed or special government backed programs. But you must do your due diligence and if you start the paperwork with them, be persistent until you get an answer.
  5. Some entrepreneurship training programs have accumulated a reserve or grant to help their graduates launch their businesses. Normally, you must be a graduate of their program in order to qualify.
  6. Private investors who are looking for high returns in lieu of other types of investments such as stocks, housing, etc. In these cases, you will need to have a strong track record and a well-conceived prospectus.
  7. Our Urban Luau fundraisers, which is made up of Urban FIRE graduates, coordinate and take part in raising monies for fellow graduates who don’t have the funds to pay for a business license, fictitious business name, and minor startup costs (up to $200 per).
  8. Other possibilities but unlikely: credit cards (unless you can pay back the principal amount each month to avoid high interest rates), venture capitalists, and going public.

So What’s Included In Your Business Plan’s Financial Section?
The critical financial information for your business plan starts with the initial capitalization. The information I’ve provided from the first paragraph onward of this section should be considered with all due seriousness in order for you to plan how you will finance your business. Our business plan  - which you’ll compose in Urban FIRE II or LaunchPad - is for a one-year period). Through the two dozen business plans I’ve written and hundreds that I’ve read, I can say without hesitation that 100 percent of all business plans are changed within the first year. And 90 percent of them have been written out of reluctance because their financial institution required it or the writers felt it was the required process to go through.

Our business plan is about reality and it only covers the first year to get you up, running and stabilized. This business plan is a living document for you, not for investors, the bank or your parents. First figure out where the money will be coming from, whether it is a loan or investment and the starting amount. Also describe how you’ll spend the money to launch your business. Will you buy office equipment, inventory, marketing materials, a website, or will you hold it as working capital for each job you’re able to win?

Just for the Heck of It
As an option when you have nothing better to do, draw up a three year projection of your sales, possible profits and expenses, and what your cash flow will look like. I use to do this with the utmost consideration for accuracy just to see how far off I’d be in the coming years. But it’s also good practice for using QuickBooks. Do this by creating an annual profit and loss statement for each of the three years. You can do this by inputting all your starting expenses and capitalization in a dummy account that you set up as a sample business. I am so adamant about you installing QuickBooks before you start your business, that if I find out that you haven’t started using QuickBooks, I will have to strip you of your designation as an “entrepreneur.” Instead you will be officially titled as “nincompreneur” (from the Latin origin “non compos mentis” meaning “not of a sound mind”).

With your best estimates, show your monthly income and expenses and continue to input these details monthly for 36 months. The finer the details, the more precise your projects will look, and with these figures, you’ll also be able to come up with a balance sheet showing the net worth of your enterprise. All financial considerations should be made including any loans and their projected payoff, lulls and high points in the year based on your Industry’s records.

Not that anyone will be disappointed if your figures are off in three years, but do the best you can to come up with numbers that you feel are attainable and realistic. As you complete each year, you’ll see how close you came to your projections. As you gain financial data over the months, your annual projections will gain greater accuracy so that each year, as you readjust your projections, the numbers will calculate more precisely, and provide you with a powerful tool in predicting the future.

Startup Costs Estimates
In this space below, write in your costs (or estimated costs) for starting your business. These are general categories with various expenses. QuickBooks has a resource that can break down a more itemized list for your startup. You can also use the Profit and Loss Statement below for additional ideas.

Legal Startup costs and licenses (legal entity, fictitious name, etc.)                                               __________
Capital Equipment (computer, phones, desk, chairs, copier, file cabinets)                         __________

Professional Services (legal, financial, insurance, marketing, webpage)                                        __________

Office Expenses (phone, Internet access, utilities, rent, insurance, office supplies)                       __________

Sales Expense (inventory, manufacturing, warehousing, shipping)                                     __________

Marketing Expense (business cards, letterheads, marketing materials, advertising, travel)            __________

Wages and Benefits (paying yourself and any partners, employees if any)                         __________

Some Key Notes:
You can deduct up to $5,000 of your startup expenses when they are taken in the year you launch your business. This will include everything except for capital equipment. The odds are, you won’t be spending $5,000 and really, you should conserve and watch your spending habits. The “good stuff” can come later when you can afford to splurge. Capital equipment is “depreciated” meaning that the government says over the course of several years, they will be used and in each of those years, they can be deducted from your taxes. For instance, if you purchased a computer (or other electronic equipment) for $1,000, you can depreciate it for five years at the rate of $200 per year off your income taxes for the business (or your personal returns if a sole proprietor, partnership or LLC). For furniture, it’s seven-year depreciation. Once your first $5,000 is written off, any further deductions must be amortized (equally distributed) over 15 years, not exactly worth the expense. 

Lesson #9: Using Financial Statements As Scorecards, Part 1

I know that most of us have a vague understanding of finances as it relates to your business. Don't despair! Learning a few key components about business finances will go a long way to make sure you're making money. Surprisingly, most people going into business don't know if they're profitable or not! Being financial dumb is a bad excuse for any business failure. 

Making Finance Your Sexy Partner

QuickBooks is the recommended software because it is easy to use, it’s like a mother hen to your inexperience in bookkeeping and if you really screw up, there are more experienced QuickBooks bookkeepers than any other accounting package – by far. Intuit, the makers of QuickBooks, has several levels of sophistication of their QuickBooks product.

The simplest version is simply entitled: “Simple Start” but it’s been converted from the standalone computer version to the online version. Instead of paying a one-time price for the product, you’re required to pay $12.95 per month or $155.00 annually. No doubt, it’s a good product and safe since all your data is on their servers (aka cloud computing) and accessing the info can be done wherever there’s a computer. However, if your budget doesn’t like that monthly fee, your other choice is QuickBooks Pro (Retail: $200 and Street: $150). It’s more sophisticated but quite learnable and frankly, as powerful a program as you’ll need for several years. Your files from Simple Start will also easily move over to Pro.

Of course, if you feel comfortable with cloud computer and its advantages, then there are two other online versions of QuickBooks – Online Essentials ($24.95/month) and Online Plus ($39.95/month) - that can expand your range of sophistication and options –

Learning to enter data accurately and setting up a double-check system are ideal because, in many cases, the person entering the data (most likely you) will need time to get up to speed with QuickBooks, so the possibility of errors is reasonably high. By having an outside bookkeeper check your work, you’ll have greater accuracy. To find a local QuickBooks bookkeeper, you can go to: and if you want one for the web version, you can go to:

How to Learn QuickBooks
Get acquainted with QuickBooks by practicing every day for an hour with your personal financial data. (Don’t worry—QuickBooks can handle multiple companies, so when you’re ready to launch your business, you’ll be able to start from scratch while retaining what you’ve already done in a separate file.)

Use QuickBooks to track your monthly income and expenses. Check out the account categories:     
  • Bank
  • Equity
  • Current assets
  • Long term liability
  • Fixed assets
  • Expense
  • Income

Also check out the “vendor” and “customer” categories. These will be useful when you start to input your business financial data.
As you enter information, the program will require you to categorize the information into different buckets. Examples:
  • PaycheckàIncome
  • Cell phone billàExpense
  • GroceriesàExpense
  • Stock DividendsàIncome
  • Stock PortfolioàCurrent Assets
  • ComputeràFixed Asset (with a value placed to it)
  • Car and monthly paymentsàLong-term Liability
  • Cash in the bankàBank (Later, as you put in money to launch your business, the amount (i.e. $500 should be listed as “equity.”)

These categories are essential for providing an accurate report on your financial health. Pretty soon, you’ll be a darn good money manager. Be diligent and accurate in your bookkeeping, double-check your entries, and remember this simple rule: spend less than you earn. That way, you’ll always be on the sexy side of the ledger.

At this point, let’s define some basic fiscal jargons before you’re introduced to the financial scorecards. And believe me, once you start using scorecards, you’ll have a powerful tool for controlling your finances. It’ll make your life a whole lot easier.

Defining Assets and Liabilities
Assets are positives but they are defined in different ways. When banks are considering you for a loan, they will call your car and boat an asset even though you are still making payments on them. In the most productive use of the term, we can define asset as an income generator - something that will produce income for you such as an interest-bearing checking account and larger entities such as rental property (when the rents surpass your mortgage payments and other liabilities).

Assets include:
·       Cash
·       Bank accounts
·       Stocks, mutual funds and bonds
·       Jewelry made of precious stones
·       Office equipment and furniture
·       Retirement funds
·       Debts owed to you (such as service performed)
·       Net value of your business
·       Net value of income-producing real estate you own

Liabilities include:
Liabilities are negatives. It is money owed and includes:
·       Credit card balances and invoices due
·       Mortgages and lines of credit
·       Car loans
·       School loans
·       Personal loans
·       Taxes owed

Income and Expenses
People who cannot control their cash-flow will always work for others while people who have mastered their cash-flow abilities will have control of their wealth strategy and will define their financial condition as working for themselves.

Income is used to pay your expenses, and unless you have sufficient income over and above your debts, you enter into greater debt in order to make your payments. When you work towards financial security, you can use one of the three forms of income to pay off your debts (defined below). As your asset column increases, the debt side decreases proportionally.

Income is money coming to you. These sources of income include:
·       Wages, tips and salary
·       Interest on investments and dividends
·       Rent from real estate
·       Business profits distributions
·       Capital gains
·       Royalties

Income is classified in three basic types:
·       Earned income
·       Portfolio income
·       Passive income

·       Earned income is wages and salaries from the work you do for others whether in your own company or as an employees.
·       Portfolio income is a type of passive income and it is income derived by stocks, bonds, mutual funds, dividends, royalties and interest earned from savings accounts and loans.
·       Passive income is money generated by a business or real estate holding with minimal effort from its owner. It is also the least taxed.

Expense is the payments you must make on the debts you owe. This is the negative side of cashflow when money is leaving your possession. Expenses include:
·       Credit card payments
·       Home mortgage payments
·       Taxes
·       Loan payments
·       Utility payments
·       Living expenses such as grocery and gas
·       Travel and entertainment
·       All personal expenses

Expense is not only the original amount owed but also the interests accumulated over time. Credit card debt is one of the worst kinds of debts because the interest rates are so high and it is usually used to purchase things that do not create an asset. For many people, credit cards are a seduction to buy because they are so easy to use. The financially literate person will continue to use credit cards for their purchases but pay off the balance each month so as not to incur interest charges. (A quick side note: student loans recently surpassed credit cards as the largest category of debt, according to a federal report issued in April, 2011. In fact, just over 60 percent of college students said they were considering dropping out because their debts had risen so much.)

Debt; however, can be good when used to purchase items that will increase your net worth and/or generate income greater than the expense necessary to purchase the item.

Financial Scorecards
Financial Statements
QuickBooks will generate financial statements based on your data. Financial statements tell you where you stand money-wise. These reports are mandatory to run a successful company and required when applying for bank loans. Usually, the two key reports that most financial institutions are looking for are your Profit and Loss Statement (or Income Statement) and your Balance Sheet (or Statement of Financial Position). There are also two other reports: Statement of Retained Earnings and Statement of Cash Flow. Some banks also may ask to look at these additional statements.

Profit and Loss Statement
The Profit and Loss Statement (or Income Statement, Earnings Statement, Operating Statement) is a company’s record of revenues (money received from sales of products and services, referred to as gross sales or gross revenues) less its expenses (both the costs of the goods and the cost of operating the company). The critical piece of information derived from this statement is called the net income or, in Hollywood language, the bottom line.

The P&L shows the revenues and expenses for a given period of time. Its purpose is simply to show whether the company made money during a certain period of time. In QuickBooks, you can use any set of dates for that period. The most common would be monthly, quarterly, and annually.

The revenues indicated on the P&L is normally written at the top of the statement. Below that is the cost of the goods, if it’s a product, and any returns you may have taken back. If the revenues come from service, there would be no cost of goods. But the cost of providing the service and that would be indicated in salaries, commissions and perhaps, external contract services.

After the revenues, you will see expenses, which is the cost of everything necessary to run the company. The final figure (the bottom line) is exactly in that position—the last figure on the report. It is derived from taking the revenues minus the costs of goods, returns, and all the other expenses to run the company. A simple P&L for a small business looks like the following:

March 1, 2010 to March 31, 2010
 Gross Sales
 Sales Tax Collected
 Less Returns
 Costs of Goods
 Gross Profits


 Commission and Bonus
 Accounting & Bookkeeping
 Microloan Payment (Mthly)
 Insurance (amortized 12mth)
 Equipment Leasing
 Car Lease
 Phones and Internet Svc
 Marketing and Advertising
 Office Supplies
 Travel and Hotel
 Payroll Service
 Employment Taxes        
 Taxes (Sales)
 Total Expenses

(Deduct from Gross Profits)

Net Income (the Bottom Line)  $5,300.00

For nonprofit organizations, the IRS requires a different kind of reporting that essentially does the same thing. However, this report is called the Statement of Activities and includes all of the same categories plus grant revenues and other donor revenues.

A Balance Sheet or Statement of Financial Position is a summary of the money owned and the money owed for your business. The Balance Sheet is a snapshot of a company’s financial condition. It has three components:
  1. Assets
  2. Liabilities
  3. Ownership equity

In a Balance Sheet, the main categories of assets are listed first and in the order of liquidity (meaning assets that are easiest to turn into cash i.e. cash in the bank, outstanding invoices still owed to you by clients, inventory, etc.). Liquidity is a measure of your ability to pay your debts as they fall on their due dates. It is usually expressed as a ratio or a percentage of current liabilities. Following all assets shown, comes a listing of the liabilities. The difference between an asset and a liability is called equity, net worth, or net assets. In an accounting principle called the Accounting Equation, the net worth = assets - liabilities. Another way to look at this equation is as follows: assets = liabilities + owner’s equity (or money). Balance Statements are always shown in two sections: assets and liabilities (plus net worth in the other).

As long as you retain an accurate system of data entry, QuickBooks will provide its own “double-entry” accounting system which is at the heart of the Balance Sheet. It’s not the same as keeping two sets of books like you see you in the old gangster movies where one set goes to the feds and the real set shows all the money from drug deals, offshore accounts, and wild crazy parties.

A double-entry system simply means that for every action, there is a reaction or in accounting terms: debits and credits. So for instance, if you bought ten dollars worth of baseball cards, your debit shows up as $10 spent and your credits would show up as $10 worth of baseball cards. They reside on opposite sides of the Balance Sheet and are double-entered automatically by QuickBooks. The double-entry system is sort of like an error-detection system because if at any point, the debits don’t equal the credits, something is amiss.

The Balance Sheet also shows the various assets and liabilities that a company possesses. If it’s an all cash business with no inventory and no loans, a business could theoretically go to the bank and withdraw all its money to determine the business balance. However, the vast majority of businesses will have outstanding loans, clients will owe them money, rent, equipment, leases, and office furniture. All these values need to be accounted for—assets and liabilities—and the sum total of their values is what the Balance Sheet is all about. Here’s a sample Balance Sheet for a Small Business:

Liabilities and Owner’s Equity
Cash              $5,000.00
Accounts Receivable $7,500.00
 Notes Payable    $10,000.00
Inventory      $9,000.00
 Accounts Payable   $ 5,000.00
Equipment     $7,500.00
 Total Liability    $15,000.00

Owner’s Equity

 Notes Receivable   $12,000.00

 Retained Earnings   $ 2,000.00

 Total Owner’s Equity  $14,000.00
Total      $29,000.00
Total      $29,000.00

The Two Other Reports
There are two other financial statements that are key to understanding the financial health of your company. Besides the Balance Sheet and the Profit and Loss Statement, there is the “Statement of Retained Earnings” and the “Statement of Cash Flow.” All four reports are basic financial statements required under the “Generally Accepted Accounting Principles” or GAAP that is a fundamental standard for the Accounting profession.

Within QuickBooks, you’ll be able to generate any of these four reports as either a general report or a detailed report. Just remember that for the Statement of Retained Earnings, you’ll find that within the Balance Sheet reports.

Statement of Retained Earnings
You’ll recall that in the Balance Sheet, there is a section under Owner’s Equity entitled “Retained Earnings.” Retained earnings refer to income (or profits) that were not distributed to its owners (or stockholders). In this report, these profits are seen over a designated period of time, usually discussed in quarters (three months) and annually. Its role is in showing the changes in net income (and the value in the company which means your financial worth is rising or falling) by first displaying the starting or opening amount of a certain period and the ending amount for that period (such as January 1, 2010 to December 31, 2010). In-between these two numbers are the reasons for the increase or decrease of the ending numbers. These reasons would include profits or losses, dividends paid to owners and stockholders and any other credits and charges (such as employee theft).

Hasta La Vista Dynamite Company
Statement of Retained Earnings
For the Year Ending December 31, 2010

(Opening) Retained Earnings – January 1, 2010                            $120,000.00
Plus Net Income                                                                                  30,000.00
Sub Total                                                                                         $150,000.00

Inventory Loss (Employee Theft)                                                        -5,000.00
Less Dividends                                                                                   -15,000.00
(Ending) Retained Earnings – December 31, 2010                         $130,000.00

As you can see, the income information for the Retained Earnings report comes from the Profit and Loss Statement. The ending figure is provided to the Balance Sheet under Owner’s Equity.

So that in the Owner’s Equity of the Balance Sheet, Retained Earnings would be either the net profits you’ve made or net loss you’ve suffered (which means that your retained earnings would show a lesser number and lower the value of your investment – much like a publicly traded share of stock). Retained earnings are also lowered by “dividends” defined as net profits that are distributed to stockholders rather than returned to the company for its use.

The Statement of Retained Earnings is also called “Equity Statement,” “Statement of Owner’s Equity” for a sole proprietorship, ‘Statement of Partner’s Equity” for a partnership and “Statement of Retained Earnings and Stockholder’s Equity” for a corporation.

Statement of Cash Flow
This statement shows a company’s liquidity and thus, its ability to pay its bills. It is strictly a “cash basis” report on three types of financial activities:
1.     Operating Activities – sales of your products and services, payment to vendors, salaries, interest payments on loans, depreciation, amortization, dividends received by company
2.     Investing Activities – purchase of assets like inventory, land, a building, stocks and bonds, loans made to vendors and clients
3.     Financing Activities – payment of dividends, sale or repurchase of company shares from investor(s), repayment of debt principal

Another key use for this statement is to give you a projection for future cash flow possibilities, a helpful tool for planning ahead.

People who would be most interested in knowing a company’s cash flow would be the owners, its bookkeepers and accountants; lenders and creditors; potential investors and shareholders.

The Statement of Cash Flow only includes the movement of cash - simply called “inflow” for cash or cash equivalents coming into the company and “outflow” for cash or cash equivalents leaving the company. The statement reveals the current operating results and the specific cash movement that created the changes revealed in the Balance Sheet. It does not include depreciation, write-offs of bad debts or credit losses to name a few not affecting cash received and payments made.

(Note: the cash indicated in this report is not the same as the “net income” found in the Profit and Loss Statement because cash flow may be different if you have Accounts Receivable meaning that you’ve given your clients an invoice from which to pay you over a certain period such as 15 or 30 days. This is called “net terms.” In your P&L, your invoices will count as Assets even if you haven’t received your payment. However, in this Cash Flow Statement, nothing gets counted unless you’ve received the money making it truly a cash-only report. If you’re collecting your money from your clients without fail, then the differences should even out over time.)

Hasta La Vista Dynamite Company
Statement of Cash Flow
For the Year Ending December 31, 2010

Operating Activities
     Cash received from customers                                          $140,000.00    (Inflow)
     Cash received from interest/dividends                                    2,000.00    (Inflow)
     Cash paid for salaries                                                           (60,000.00)   (Outflow)
     Cash for rent                                                                         (12,000.00)   (Outflow)
     Cash for Operating Expenses                                               (11,000.00)   (Outflow)
     Cash provided by Operating Activities                                $59,000.00    (What’s left)

Investing Activities
     Inventory                                                                               (17,000.00)   (Outflow)
     Google Stocks                                                                       (10,000.00)   (Outflow)

Financing Activities
     Payment against Owner’s Equity                                          (10,000.00)   (Outflow)

Decrease in Cash During Report Period                                (37,000.00) (Investing & Financing)

Total Cash During Report Period                                            22,000.00

Cash on January 1, 2010                                                           10,000.00
Cash on December 31, 2010                                                      32,000.00

Some Tips on Cash Flow Management
Once you’ve started collecting payments for your services and products, always hold onto as much cash as possible. It’s tough for new companies to keep a secure amount of cash so being frugal and having a plan for savings will serve you well when new business opportunities arise. Keep that in mind even as you grow and the cash conditions improve.

As new business owners, we sometimes have the tendency to mix our credit card buying habits with the same kind of carefree logic as our personal spending habits. Without justifiable evidence we might arbitrarily decide to increase our inventory, add a new employee or purchase office equipment that depletes our cash. Suddenly, when the bills come due and you find yourself with a cash shortage, you’re stunned and babbling like Lt. Colonel Nickelson, who in the World War II movie, “Bridge Over the River Kwai,” utters those famous last words: “Oh my god, what have I done.” (Great movie: see it to find out in what context he spoke that unforgettable phrase.)

So listed below are some ways you’ll control your cash flow:     
Utilize the web. Without a doubt, starting a business today is so much cheaper than just five years ago because many of the business development and marketing tools – many of which are free – are available to you on the Internet. There is no excuse and no way not to be using the Internet to build your business! 
Make financial projections. Forecast both expenses and anticipated revenues for at least the coming year. This will help you predict when you're likely to have cash and when you're likely to need it. You should also maintain a cash reserve if possible. Don’t skimp on this process. You need to think this one through!
Create contingency plans. Just as the GPS asked you the question about what’s the worst thing that could happen to you, you can do the same for your business particularly as it relates to your cash flow. Have several budget projections, including best case and worst case scenarios, and how you might respond. In the event sales don't take off as expected or there's some unforeseen problem, you'll be better prepared.
Keep a lid on spending. One of the most common problems with new businesses is the owners' tendency to spend freely. Do you really need an office or can you work out of your home. You can still take tax write-off on expenses and think like a guerrilla. Remember, you're in this for the long haul: save your money for the future.
Keep inventory low. Stock only what you know you can sell in the short term. Learn to use Just-in-time” inventory buying by building a great relationship with your vendors and assuring quick deliveries.
Lease, don't buy. A good way to conserve cash is to lease equipment instead of buying it. Although leasing can be more expensive in the long run, it helps you avoid laying out a lot of capital all at once for things like office furniture, computers and copiers.
Delay hiring employees.  If the need arises for you to require additional manpower for your business, use independent contractors and consider outsourcing certain nonessential functions. Employees are expensive because you’ll have to pay for employment taxes, social security and worker’s compensation – even with one part time employee. So wait until you’re sure that an additional employee will contribute to the bottomline. 
Pay yourself enough to pay for living expenses. Before you launch your business, get rid of any non-essential luxury items and expenses including that $4.50 latte every morning. Make it yourself. Learn to live (and be happy) without luxuries. Jeff Bezos, founder of Amazon.Com still use plastic folding tables in his conference room. Why? Because it serves its purpose.
Speed up customer payments. Try to get customers to pay on time or early, if possible. Offer incentives like discounts on early payments or cash deals. Adopt effective collection techniques for deadbeat customers.
Don't be wasteful. Recycle and reuse what you can -- for example, boxes, computer discs and file folders. The savings may not be large on any given item, but they can add up over time.