Tracking Cashflow (for Non-Accountants)

One of the most important things an early-stage startup must do is track cashflow (see my previous post My Top 10 CEO Lessons).  But for a variety of reasons, many startups do this poorly, spend too much time doing it, or don't do it at all.

Because many entrepreneurs are not trained in accounting (nor do they want to be), the two most common questions I get are:

1. Is there an easy way to track cash without having to be an accountant or spending large amounts of time learning QuickBooks (or the equivalent) short of hiring an accountant?
2. I use accounting software, but the standard reports don't really help and looking at my bank balance doesn't help me with outstanding checks.  Is there a better way to get a forward projection of my cash?

Before I go any further, let me first clearly state that in my opinion, if you are running a serious business, you should at a minimum be tracking accounts using QuickBooks or the equivalent.  This goes triple if you've taken "friends and family" money in any way, shape, or form.  If you can't or don't want to do this yourself, then spend the few dollars a month it takes to hire a competent bookkeeper.  You have a fiduciary responsibility to your investors to do so.

In any event, to help our clients, I've developed a simple cash tracking spreadsheet in Excel that you can download for free here from my company's website.  I recommend tracking cash weekly.

Disclaimer:  This spreadsheet is meant to be simple.  There are no macros, automated routines, or fancy error-checking routines built in.  If you insert or delete cells, be sure you haven't messed up any formulas.  Use it at your own risk.

Additional tips for maintaining control over cash for an early stage startup:

• Maintain a separate bank account for the business - Its virtually impossible to maintain control over cash when it's co-mingled with a founder's personal bank account.
• Limit the number of company credit cards to just one (and preferably zero) - Credit cards are a recipe for runaway spending.  The more cards, the tougher it is to maintain control.  If you must have a credit card (some services require submitting a credit card for auto-billing) have just one.  It's better to have auto-payments done via online bill pay.  If its a convenience issue, reimburse personal credit card use via an expense report system.
• Require employees to submit expense reports for company expenses that they pay for - See above.  You'd be amazed at how much more careful people are with the company's money when reimbursements are subject to approval.
• Anti-fraud control #1:  Dual check approvals - Have the person who initiates a check, online bill pay, or wire be different from the person who approves it.  If there is only one person, then it should be the CEO/founder.
• Anti-fraud control #2: Dual bank deposits - Have the person who receives checks be different from the person who deposits them in the bank.  If there is only one person, then it should be the CEO/founder.

Startups die when the cash runs out.  It's worth the effort to track it so you don't get surprised.  Know your cash.

Uncontroversial Company Values

"You've got to talk to the company right now!  Or we're going to lose key people today!" declared the marketing director of my newly inherited executive team.  I had just been appointed president of Luxtron and the company was in turmoil.  Several week earlier, my predecessor and the VP of Sales had left the company and anxiety was running high as to what the new president - me - would do.

It was Friday afternoon and I had just stopped in to drop a few things off at my new office and sign some paperwork.  Thirty minutes later, I found myself facing close to 100 people in the company break room.  What should I say?  Should I talk about our forward strategy?  I didn't have one.  Should I talk about how we were going to fix the company?  I wasn't even sure what the problems were!

No one gets more scrutiny than the guy at the top and what these people wanted to know were a few basic things?  Who was I?  What was I going to do?  How would I run the place?  And most pressing of all, what was going to happen to them?

So I decided to discuss values.

Given the panic in the air, why start with a soft squishy concept like values?  Because while I couldn't tell them what I was planning to do (I didn't know myself!) I could tell them how I planned to run the place and what my expectations for them would be.

So in the heat of that moment, I articulated four values (which today is up to five) by which I would run the company.  And while it seems that in today's culture wars, values are more often than not used to divide people, I've found these values to be ones that most everyone can agree to.  I 've since used these values in every subsequent company I've run.

• Honest & Open Communication - This means telling the whole truth; not just some fragment cherry picked to support an agenda.  More importantly, this means truth delivered directly, face-to-face, in open forum, not behind closed doors.  No innuendos and shaded meanings.  And most importantly, this means open disagreement, not "yes" in the meeting and "no" afterwards.  Of course, there are those people for whom brutal honesty is not a problem which leads to...
• Respect for People - It's funny how people who pride themselves on being brutally honest seem to revel in the "brutal" part.  Respect for people is best summed up by the golden rule of "do unto others as you would have them do unto you." This means civility;  no tyrannical browbeating, verbal bullying, and lording it over those who work for you.  This means taking seriously what others have to say, not spreading malicious gossip or tearing others down behind their backs.  This means being considerate of other people's feelings. Or as the Robert Fulghum says, all the stuff Kindergarten tried to teach you.
• Meeting Commitments - This means keeping your promises.  In the interconnected world of a company, others are relying on you to keep your word so that they can keep theirs.  This does not mean playing it safe and only committing to what you can comfortably do.  In business, stretch goals are necessary which means sometimes we miss.  But when we miss, we should make amends where possible.
• High Ethical Integrity- At the most basic level, this means complying with the letter of the law.  At the highest level, it means doing the right thing consistent with your values.  It means doing nothing that you wouldn't be proud to see published on the front page of the newspaper for your family to read.

So what was the impact of my little speech?  I saw a few heads nod but for the most part there was dead silence.  There were no questions.  And I lost two people that day.  But I had put my stake in the ground and over the next several months, these values served as the foundation for the company's turnaround.  How so?

Because I began to fire people who flagrantly violated them.  It's one thing to say you expect people to respect their peers.  It's another when you fire a sales manager who constantly badmouthed his co-workers.  It's one thing to say that you expect open and honest communication.  It's another to remove a manager who consistently agreed to certain actions in staff meeting then sabotaged them outside of it. It's another to say you expect high ethical integrity.  It's another to terminate a supervisor caught taking kickbacks from a vendor or to lose a sales because you won't pay the customary "commission" to a local government official.  Real values are anything but soft and squishy!

In my experience, one of the root causes behind a turnaround situation is a dysfunctional culture, and one of the root causes of a dysfunctional culture is ambiguous values.  How so?

• Politics - When communications are hidden in secrecy and game players allowed to spread innuendos and gossip without consequence, this allows the spread of politics.
• Apathy - When people feel that their efforts aren't appreciated, their voices not heard, and that what they do has no impact, then they cease to care.  To quote Dave McClure, "startups die because nobody cares."  He was referring to customers at the time, but it holds just as true for employees.
• Non-performance - When people talk a good game but habitually fail to meet their commitments to co-workers, others start to ask what's the point of giving it my all?  Non-performance is infectious.
• Loss of pride - When senior managers turn a blind eye to ethically questionable practices, or worse, perpetrate them, employees lose their pride in the organization and the best leave.  Most people want to be associated with a company they can be proud of.

As the people at Luxtron began to see that I was serious about running the company in accordance with these values, the environment began to change.  A few brave souls began to challenge the status quo and even criticize the way we were doing things.  And when they didn't get fired for it, more began to speak up.  As we implemented their ideas, company performance began to improve, which made people realize that they could impact what we were doing.  They began to care again. And as care for the company grew, the employees began to hold each other accountable for performance.  And trust me, there is no tougher supervisor in the world than one's co-workers; peer pressure is tough stuff.

Did we live up to the values perfectly?  Of course not.  Sometimes we made mistakes.  Sometimes we got lazy.  But at least everyone had a guiding star to shoot for and over time, the values just became part of the way we did things.


In the end, I found that I had to add a fifth value to the list. Why? Because it enables all of the others. What was it?   

Courage.

Partners & Co-Founders

On April 17th, I'll be speaking at a "how to start a business" seminar being hosted at Peninsula Bible Church in Palo Alto, CA.  One area I've been asked to discuss is partners and co-founders.  My current company, Infrastructure Group, was co-founded with a partner. And most of the technology startups I work with, especially those planning to seek institutional funding, involve at least two or more partners.

To Partner or Not to Partner
To use the oft repeated cliche, entering into a business partnership is like getting married, and it should be approached with the same degree of care.  There are pros and cons to taking on a co-founder or partner vs. hiring an employee or contractor.

The pros:

• Partners can provide complementary, critical skills that you lack - This is the most common reason technology startups have co-founders.  The range and depth of skills required to build a scaleable technology enterprise are almost always more than any one person can provide.
• Work load sharing and backup - A partner can help share the work load and act as a backup.
• Bringing a different perspective to business decisions - A good partner can be a sounding board and bring a different perspective to problems, opportunities, and decisions facing the business.

The cons:

• Profit sharing - You will be sharing the profits and gains with your partner.  This means that you will need to generate sufficient revenue to support not only yourself, but your partners as well.
• Potential conflicts - Having partners means that they will have a say in business decisions and direction.  You won't be free to just do things the way you want.  And the process of compromise takes time, energy, and some degree of interpersonal skill.

In deciding whether to take on a partner, weigh the cons against the alternatives.  For example, you can acquire missing skill sets and share workload by hiring contractors or employees.  They earn a wage, but you get to call the shots and keep any profits for yourself.  Need a sounding board?  Seek out trusted advisors or meet regularly with people in your network whose judgment you trust.

One bad reason to take on a partner:  emotional support.  Starting and owning a business can be scary.  So many people take on a partner to give them emotional strength.  This leads people to take on friends as partners who might not otherwise be qualified which then leads to problems if that person isn't pulling their weight.  Rather than being a source of emotional comfort, the partner now becomes a source of stress.

What to Look for in a Partner
Assuming that you've decided that you want to take on a partner, other than skill set, what else should you look for?

• Trustworthiness - Can you trust the person completely ethically and financially?  If you can't trust them with equal access to your business bank account, even if things were to turn bad, do not take them on as a partner.  This is non-negotiable.
• Shared Values & Objectives - Do they share the same core values as you with respect to right and wrong, treatment of people, ethical behavior, fair play, and other values important to you?  Do they have the same objectives for the business?  Are they in the partnership for the same reasons you are?  Shared values are important in being able to resolve the decisions and disputes that will ultimately arise.
• Can Place the Interests of the Business Ahead of Their Own - There comes a time in all businesses when the partners need to make short term sacrifices for collective long term gain.  If your partner can't or won't do that, it will make it difficult to build the business.
• Compatible "Stress" Style - How will your partner react under stress?  How do you react under stress?  And when you're both under stress, will those two styles work together or explode?  How should your partner deliver bad news or confront you?  You want a partner with whom you can disagree without losing respect for each other.
• Compatible Work Style - How does your partner like to work?  How do you like to work?  Do you share the same work ethic?  This is the area where little irritations can build up, so it's best to get them on the table now.
• Complementary Personality - In addition to complementary skills, a partner with a complementary personality can strengthen your business.  Are you an introvert who hates to sell?  Maybe having an extrovert partner would add strength to your business.  Do you like to wing it?  Maybe partnering with someone with a more deliberate style would act as a nice safety net.  However, the same personality differences that can add strength can also be a source of friction.

As you might guess, being able to determine this means knowing your potential partner quite well.  And this means you have to spend time with that person beforehand.  Don't rush into a co-founder decision.  There is one thing worse than having no co-founder;  it's having the wrong one.

Entering Into a Partnership
If you decide to take on a co-founder or partner, what's the best way to proceed?

• Legally Incorporate - The exact form will depend on your business and tax situation.  Even though this adds expense, the reason I recommend this for partners is that first, this reinforces that this is a business partnership, not just an extension of friendship.  Second, you will be co-mingling assets and will need to define profit sharing splits.  As part of this process....
• ...Work Through an Operating Agreement - If a business partnership is like a marriage, this is the pre-nuptial agreement.  In addition to working out profit and gain splits, defining mutual decision conditions, and spelling out rights and responsibilities, the most important benefit of an operating agreement is working through the "what if things go wrong" scenarios.  An operating agreement should spell out under what conditions a partner separates from the firm and what the associated mechanics are.  And if you find that you can't discuss this with a potential partner, then you aren't close enough to be in partnership.
• Define Roles & Responsibilities - To minimize points of conflict, it helps to define the areas of responsibility for each partner and spell out under what conditions a business decision needs to be made by mutual assent vs. when it can be made autonomously.

While taking these steps is no guarantee of success, they should improve the odds that the partnership ends up being a source of strength, not strife, for the business.