Published July 05, 2013
What's one key financial or cash-flow related item all new entrepreneurs should track closely?
The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world's most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons. Email your questions about best practices for starting up and/or managing a small business to email@example.com.
No. 1: Track Your Runway
From Bhavin Parikh of Magoosh Test Prep
Runway is the amount of time you have left before you need to close up shop. It's cash in the bank divided by net loss. For instance, you wouldn't invest in a six-month project if you only had three months left. Tools such as inDinero are great at helping you track your runway and keeping an eye on your overall financial health.
No. 2: Monitor Your Networking Budget
From Vanessa Van Edwards of Science of People
Young entrepreneurs need to be hustlers! You hustle over coffee, at networking events and during conferences. What entrepreneurs often forget to track is how much money they're spending on coffees, dinners and entrance fees for networking. These investments are usually essential. But be sure to write those expenses off, and to save money, get tea instead of coffee and eat at home.
No. 3: Watch Your Burn Rate
From Erik Severinghaus of SimpleRelevance
The only thing to worry about is your burn rate (expenses minus revenue). Make sure that you understand this on both a cashflow and an accrual basis. But the best way to raise capital at great valuations and keep control of your company is to quickly get to a place where your revenue exceeds your cost. Then you can decide whether or not to invest in growth to grab market share.
No. 4: Monitor Your Cash on Hand
From Wade Foster of Zapier
Cash is king. Your number one job as an entrepreneur is to not run out of money. So keep a close eye on how much money you have in the bank and your burn rate. If you know your burn rate and the amount of cash you have on hand, then you know how long your business can survive and what sort of risks you can take in the future.
No. 5: Understand Your ROI Channels
From Aaron Schwartz of Modify Watches
As you scale, investors will ask, "What is your marketing ROI?" Knowing how this number changes over time will help you see which channels give you the best returns. The sooner you track this number closely, the sooner you can look at an investor and explain that you can invest in one project, which will generate return. This level of insight is critical to growth.
No. 6: Stay Current With Accounts Receivable
From Ryan Buckley of Scripted, Inc.
For business-to-business companies, the key financial metric is important. Every investor will ask about it, so you should know this number and how long it takes to clear your invoices. Letting your accounts receivable number explode leads to cash cycle problems and can drive your business to the ground. Entrepreneurs in B2B companies should evaluate this number every two weeks.
No. 7: Track Customer Lifetime Value
From Robert J. Moore of RJMetrics
Tracking customer lifetime value is essential for building a modern business. Understanding what your customers are worth in the long run can be far more valuable than simply knowing what they will spend today. This knowledge can be folded into marketing strategy, merchandising strategy and other key areas of your business.
No. 8: Know Your Payment Terms
From Henry Glucroft of Henry's / Airdrop
For new businesses, the right payment terms can make a world of difference. Just as convenient as net 30 can be in having extra time to pay for inventory, you cannot forget the obligation in predicting future cash flow. Over time, you can even get discounts for paying early and improving your margins.
No. 9: Monitor Your Cash and Check Balances
From Chuck Cohn of Varsity Tutors
Entrepreneurs need to be mindful of their cash balance and how that will change as revenue is deposited by merchant credit card processors and as checks are cashed. It’s easy to forget about a handful of checks that your vendors have been slow to cash, but it's alarming when they are all cashed at once. We keep detailed notes on expenses we’re accruing and checks we have written.
No. 10: Focus on Committed Monthly Recurring Revenue
From Liam Martin of Staff.com
We focus on only one metric each week, and that's committed weekly recurring gross profit. We based it off of committed monthly recurring revenue, but our business depends on gross profit and not revenue. It shows you how much new money you made each week as a growth metric, and it can show you direct results of promotions, too.
No. 11: Track Your Cash and Growth Potential
From Aron Schoenfeld of Do It In Person LLC
Tracking revenues and expenses is great, but if you don't have cash to pay your bills then your business won't last. Make sure you track how much cash you have on hand, maximize potential to earn interest, and figure out ways that you can grow your cash.