As I get rolling on a new startup with my partners at Startup.SC, a startup incubator in South Carolina, I am reminded of a few painful mistakes many entrepreneurs, myself included, make when starting a business.

Now, if you are starting a business, you probably have not put too much thought into how you are going to exit. There are, after all, countless considerations to make as you get started, from applying for business licenses, developing working prototypes to setting up your website. If you ever plan to sell your business or bring on investors to grow, how you run your business from the start is just as important.

Fortunately, it is not difficult to get started properly. Simply consider these four tips, often overlooked by most startup entrepreneurs.

1. Prepare your general ledger.

Setting up your accounting books may seem bland and tedious, especially for entrepreneurs without experience. Many rely on off-the-shelf accounting software, which provides general guidelines and templates to get you started. These are fine and completely acceptable for most startups, but to fully understand the financials of your company and, in the future, provide the evidence of the value you have built, you should give your set up careful consideration. Although a little pricey, it would benefit you to hire a professional when getting started.

2. Keep business business.

It is completely acceptable for entrepreneurs to pay for a variety of expenses with company funds, so long as those expenses meet the generally acceptable accounting standards (GAAP) for business expenses. Too many entrepreneurs, however, use company funds for personal use, trying to justify it with very liberal interpretations of GAAP or simply improperly reporting.

Not only could this get you in hot water with the IRS and open you up to a great deal of liability, it will be difficult in the future to separate these expenses when valuing your company. From the onset, it is best to just keep all personal expenses out of the business.

3. Report all revenues.

It is not difficult, and definitely enticing, to skim money from the business at the start, especially if you do most of your business in cash. Again, not only could this ultimately get you in trouble with the IRS, but it undervalues your business in the long run. It is going to be difficult to prove value and growth if you are not reporting real numbers from your business.

4. Keep careful records and receipts.

OK, excluding personal expenses and reporting all of your revenue just means giving more of your hard-earned money to Uncle Sam in terms of taxes. Not necessarily true. If you understand the extent of what you can expense and, more importantly, you keep copious records of your activity (both for audits and due diligence of potential buyers and investors), you can ultimately work down your taxable income without hurting the value of your company.

Grab yourself a good book or, better yet, find yourself a trusted professional advisor to learn how to best run your business this way.

I was part of a business team that looked at investing in businesses a number of years ago. It was not uncommon to meet an entrepreneur of a small business whose only proof of success and value was a shoebox full of cash. A few would emphasize that the company was paying for personal utilities, auto expenses and even groceries and that we should consider these expenses as part of the value.

The problem was that they often could not prove these claims satisfactorily because they had not accounted for them properly. In the end, it hurt the valuation of their company and gave us tremendous leverage during the negotiations.

Most entrepreneurs are not thinking about an exit when they are in the startup stages of a business. If you ever have a goal to divest or grow through investment, how you run your business before you start is just as important as after.

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Financial Blog Corliss Group: 20 essential pre-flight checks for investors

The simple checklists used by pilots and doctors every day have saved countless lives. Use these investment checklists to avoid losing money.

On October 30 1935 an early test flight of America's first four-engine bomber, the Boeing B-17, ended in disaster when it nose-dived into the ground just after takeoff.
Overwhelmed by the number of different tasks involved in flying what was one of the most complex aircraft of its time, the crew simply forgot to check that a lock on the controls had been disengaged.

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The crash led to the development of the pre-flight checklist, which pilots around the world now use routinely to ensure that the plane is ready to fly in every respect before takeoff.

An American surgeon, Atul Gawande, realised that his profession also made mistakes by forgetting key tasks - mistakes that could be avoided by the use of checklists. The introduction of these simple but vital to-do lists has saved countless lives in aviation, medicine and many other fields.

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When it comes to investing, checklists could save you a lot of money.
"If checklists designed to focus on the most vital areas and cut out unnecessary distractions can help people stay alive, then they can surely be applied to the financial markets," said Russ Mould of AJ Bell, the investment shop.
Mr Mould has come up with two checklists - one of warning signs, the other of positive aspects of a potential investment.

First, check whether a company has any of these 10 attributes, Mr Mould said. Any should give investors cause for concern.
1. Is there a dominant chief executive or shareholder?
2. Have there been frequent or transformational acquisitions?
3. If there is a focus on growth, what exactly is the company trying to grow? Focusing on growth in "earnings per share" or EPS is a particularly worrying sign, Mr Mould said.
4. Are there management bonuses that are triggered easily (usually via a level of EPS)?
5. Do the accounts regularly feature "exceptionals" and unintelligible footnotes?
6. Is the profit figure significantly bigger than the amount of cash generated?
7. Is interest cover - the ratio of profits to debt interest - less than 2?
8. Is dividend cover (profits divided by dividends) less than 2?
9. Does the company have a "mix of high operational and financial gearing"? Operational gearing means profits heavily depend on a particular level of sales, while financial gearing is simply having a lot of debt.
10. Do returns on capital consistently fail to exceed the cost of capital?

Now, here are 10 aspects of a company that could make it worth considering.

1. Is there "share price momentum"? A steadily rising price can indicate that investors are gradually waking up to a company's strength.
2. Do the shares trade at a discount relative to the company's peers and the market?
3. Is the company's market share on a rising trend?
4. Is there a record of rising profits and dividends?
5. Have the company's directors been buying shares?
6. Is the consensus among stockbrokers' analysts a "buy" rating? Try to focus on research that is certified as "independent".
7. Are profit forecasts rising steadily?
8. Is interest cover sufficient?
9. Are there any activist investors or hedge funds on the shareholder register? This could indicate that the company is about to be shaken up, potentially freeing it from poor management or a record of operational mistakes.
10. Is there a good standard of corporate governance? The chairman and chief executive should be separate and there should be strong non-executive directors.

By Richard Evans

Article Source Link: http://www.telegraph.co.uk/finance/personalfinance/investing/10833838/20-essential-pre-flight-checks-for-investors.html
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