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In the rush to start a new business, the simple act of keeping records often gets put on the back burner. But poor record keeping has been the demise of many otherwise successful businesses.

The entrepreneur needs clear and accurate records to help manage the challenges of the startup. These records can help manage cash flow and will provide financial statements that can help monitor the progress of the new venture.

The IRS expects even the smallest of businesses to document deductible expenses and support all items reported on tax returns.

Also, bankers monitor the progress of their business customers using financial information. If you cannot supply timely and accurate financial statements and other required information to your banker, it will hurt your ability to get loans when your business is at the stage where it could otherwise qualify.

The first step in establishing a record keeping system is setting up a separate checking account for the business. The deposits into this account should include any initial investment you make to start your business, the proceeds from any startup loans or investments, and all revenue from customers.

This checking account should be used to pay all expenses for the business, but not any personal expenses. As an owner you can draw money from this account, which can be deposited into a personal checking account to pay personal bills and living expenses.

Carefully document every expense paid from the business account. If paid by check, make careful notation of the check number, date of the check and purpose of the expense for each purchase. If paying with business debit or credit cards, keep detailed notes on each expense. Writing this on the back of each receipt is a good habit.

Set up a filing system, which can be either hard paper copies or scanned records, to track all documentation on receipts and expenses. Think ahead when setting up the filing system so it can accommodate the business as it grows. Use separate files for each vendor and customer and organize these files by type of expense or receipt.

Accounting software, such as QuickBooks, can help organize financial information. But remember that no system runs itself. Any system for record keeping relies on proper and timely input of information from you.

One lesson that many entrepreneurs learn the hard way is that you should not delegate financial record keeping to employees too quickly. Sadly, fraud is common in small startup businesses, and it often leads to the failure of an otherwise healthy business. Keep a close eye on financial records and put in systems of checks and balances. For example, never let the same person who handles revenues from customers also pay the bills, as this makes stealing money easier to cover up.

Record keeping may seem mundane compared with the other aspects of starting a business, but it is a critical step to ensure a healthy business. Record keeping systems should be simple to use. The job of the entrepreneur is to use this system to keep accurate, timely, consistent and compete records of all activity in the business.

Criminals take the path of least resistance. 

If your car door is locked, they tend to go to the car that was left open.

If your house looks dark and empty, it is the one they will probably break into.

Same is true for your business.  For years cyber crooks went after large business.  After all, that is where all the cyber money is.  But over time corporate America has tightened its Internet security to the point that it is no longer easy pickings.

So now they are bypassing the corporate firewalls and coming after small businesses.

An article from USA Today on cyber criminals coming after small business has gotten a lot of attention. (Hopefully not from dumb crooks who have not figured this out yet).

There is lots of information out there that can help make your business less appealing to cyber crooks out trolling for an easy mark.  For example, NFIB has a long list of articles at their site on how to improve your IT security, Visa offers tips for small merchants on data security, and the SBA offers some tips of their own.

Many of us have been warning about inflation, and it apparently is beginning to rear its ugly head.

Large businesses are better able to buffer themselves from the impact of inflation. We are already seeing automobile manufacturers and airlines raise prices to offset higher costs caused by inflation in the areas of energy and raw materials.

Small businesses are generally in a much weaker position to adjust prices when inflation kicks in. Many small businesses are already weakened by the prolonged recession and are hesitant to raise prices right now.

How can small businesses prepare for the onslaught of inflation that seems almost inevitable?

Now that inflation has begun to heat up, it is time to become aggressive with frequent small price increases. This is generally a much better strategy than waiting and trying to catch up at some point with one big jump. For some businesses that post prices, such as restaurants with printed menus, this will create a challenge. But it is worth the effort, as customers are more willing to accept smaller price increases.

Cash may be a questionable investment during inflation, as its value decreases due to its diminishing buying power as prices go up. However, cash does become a critical asset for small businesses facing inflationary pressures. Cash reserves can serve as a buffer, as costs often increase faster than the entrepreneur can raise prices. "Cash is King," even during inflation, so it is important to build cash reserves to buy time until you are able to pass along higher prices to your customers.

If your business extends credit to customers, stay vigilant in collecting receivables. Don't let customers manage their cash-flow challenges at your expense.

Debt can create risk to small businesses during inflation. The Federal Reserve will begin to use interest rate hikes to battle inflation. Pay down variable-interest loans as soon as possible, as interest rates are likely to increase over the long term and drive up the cost of debt. Be prepared for much higher rates when your other loans need to be renewed.

One way to stay ahead of inflation is to stock up on inventory before prices from your suppliers go up. But be careful not to jeopardize your cash reserves when buying ahead with inventory.

Eventually, inflation will begin to create wage and salary pressures. Smaller businesses can see profits getting pinched as payrolls go up. When this happens, focus on the efficiency and productivity of your work force.

Inflation is a completely new experience to many current business owners, as we have not had high rates of inflation in almost 30 years. Watch your margins carefully. Worry about growing profits, not just your sales.

Be prepared for more difficult times ahead. Expect a continued fragile economy, but with the added pressures of inflation.

Milt Capps who published Venture Nashville Connections contacted me the other day to see what I thought of a bill here in Tennessee that would create tax credits for angel investors.

Here is what I told him:

Targeted tax credits for angel investments do little to spur new investments or to increase the overall activity level of angel investing over the long term. They do give angels a tax break, which is not a bad thing, but spurring entrepreneurship in our economy will come from more broad-based tax cuts that leave money in the bank accounts of customers. Recent surveys of entrepreneurs suggest that what they need most to begin growing their businesses again is improved revenues coming from consumer spending, not more access to capital. This is a well intentioned bill, but not one that will have much of an impact on economic growth in Tennessee.

Others disagree with my view.  You can see arguments for, against, and some general cautionary comments at Capps' post on the angel tax credit bill.

A few years ago we received a seed gift from a donor who has now become our major benefactor for the Center for Entrepreneurship here at Belmont.

He and I had a conversation about what the gift would allow us to do.  He deferred all decisions to me, but did make a challenge.  He said that he hoped that we could find ways to leverage his gift.

What a lot of entrepreneurship programs do to leverage gifts is to set up venture funds.  They make investments in student and alumni businesses with the hope that these investments will pay off big returns.

But that model does not work in our Center.  We have our unofficial "Life Time Warranty" which states that we never take ownership or consulting dollars from any students or alumni no matter how successful their businesses become.  We will always be there as their teachers and mentors.

So we came up with a different model.  We called it our Runway Loan Program, in which we would make $25,000 loans to student or alumni businesses that needed help and showed good potential.

Here are the terms:

1. Zero percent interest
2. Repayment of principle tied to cash flow (very small percentage so as not to bleed cash)
3. Non-recourse loan
4. Once principle is paid back a gift agreement kicks in which says they will give our Center a gift of 1% of the revenue of the business we supported that continues until the business is sold.  At that point we get 1% of the proceeds of the sale.

When I presented this model to a couple of national meetings I did not get a very warm and fuzzy response.

I was told, "They will never pay it back without teeth in the agreement." 

And I heard, "No entrepreneur is going to give up 1% of revenues in perpetuity for a measly $25,000!!"

Well, they were wrong on both counts. 

We had strong interest for our initial round of two loans. 

Yesterday the first of the two loans, this one made to Just Kidding Productions (video company, whose founders also started the apps company Aloompa), was paid back to us in full.



And thanks to the on-going generosity of  our donor, we will be making many more Runway Loans for years to come!

One year ago today I blogged about a new microfund here in Nashville called Jumpstart Foundry.  I have decided that it is time to take a look back at this experiment.  There have been several initiatives like this across the country and they seem to be playing an important part in helping launch new ventures at a time when we need them the most.

Jumpstart Foundry was started by a local venture firm called Solidus Company.  The goal was to support local entrepreneurs and to help accelerate the growth of start-ups in the Middle Tennessee area.  Like most microfunds, JumpStart Foundry (JSF) has focused on very early-stage concepts.

Each of the selected concepts for our first year of operating this microfund received $15,000 in equity capital and special arrangements with participating partners for marketing, accounting, legal and technology services.  In addition, three members of the group offered their knowledge and experience to mentor the entrepreneur and accelerate the success of the project.  In return for this investment, JSF received a collective 10% ownership in the Common Stock of the company.

Because I have established for the Belmont University Center for Entrepreneurship a "no investment, no consulting fee" policy for alumni and student ventures, I have not participated financially in this fund.  However, I have been very active as a participant in this program and as an adviser for a couple of the funded businesses (I also make it a policy not to formally sit on their Boards, however).

So far the project has been a success.

Vic Gatto, a partner with Solidus Company and the driver behind JSF, shared with me some of the reasons this microfund has been so successful thus far: 
 
Diversity & Quality of our Mentors:  "I intentionally have assembled a strong group of very talented folks.  We had a good group last year and this year it will be incredibly strong and deep.  No matter what challenge an entrepreneur runs across - one of our Mentors will have direct experience in this area and be ready to provide hands-on, direct, first person guidance.  This is true in the typical areas of accounting, finance, marketing, fundraising (like other micro funds).  But it is also true in detailed technical areas such as: Scaling performance in a cloud hosted app, choosing Ruby or PHP for dev, successfully negotiating angel term sheet,  the use of 99 designs to inexpensively build a subscriber base of users, as well as lots more...  The point is - our 60 Mentors are entrepreneurs & angels themselves...not in some distant past but right now - today."

Program Content:  "Lean Startup / Customer Development in practice.  Everyone has heard the buzz words, but the JSF program will force you through the Build-Test-Learn loop. Our participants will iterate fast, build cool stuff, and get out of the building and learn about what works and what doesn't for 14 weeks until they discovery a product / market fit with paying customers to prove it.  It is a very active - 'jump in and swim' approach to the startup process."

High standard:  "We are going to be highly selective and targeted in who is accepted into the program.  JSF intends to launch 100% of our companies post graduation.  We can only achieve this in small batches.  Last year we ran at a rate of 1 per month as we built the infrastructure.  This year we will have a cohort of 6 over 14 weeks in the summer.  This may grow to 8 or 10, but we believe that quality trumps volume.    We will build Nashville one small group at a time over the next 5-10 years.  There is no shortcut that can maintain quality."

JSF Angels:   "Jumpstart is creating an angel network for the explicit purpose of supporting our graduates after the program.  These angels understand the Jumpstart Foundry way and are interested in getting involved for two distinct reasons.  They know we have very high quality investment opportunities and they are interested in building the entrepreneurial ecosystem in Nashville."

Alumni (and TS network):  "Over the next several years JSF will build a strong culture and alumni network.  JSF graduates will share a common bond with other graduates and current participants.  This will lead to opportunities available only to JSF alums.  However, we realize that building an alumni network  is a long-term process.  For this reason, we have accelerated this process by joining the Techstars Network.  It's not an exaggeration to say that Techstars may be the greatest organization for tech startup mentorship in the world.  Acceptance into Jumpstart means access to the TS alumni network, and that access is priceless." 

One of the things we learned this first year is that our entrepreneurs, like all entrepreneurs, can get a bit lonely.  To help build a community of support, we are changing our model this second year from funding one deal a month, to funding a cohort of entrepreneurs who will all work together over the summer in a 14 week program.

JSF is now accepting applications for the summer 2011 Jumpstart Foundry cohort.  The deadline for application is March 18, 2011.  You do not have to be from Nashville or intend to keep the business in Nashville.  But, if your experience is anything like mine was when I came here eight years ago, there is a good chance that once you are here you will definitely want to stay here!

There is nothing an entrepreneur likes more than a little "pain" in the market.  It is where new business opportunities often can be found. 

Lately, it has been entrepreneurs themselves who have been feeling some "pain' when trying to find seed funding.

As a response, we are seeing a variety of innovative funding alternatives pop up in the marketplace.

Andy Tabar sent along a funding website that is beginning to get a lot of attention called Kickstarter.com. 

The funding model for Kickstarter is known as crowdfunding, which brings together a large number of small investors for commercial ventures or donors for social ventures to fund projects.  It works a lot like the micro lending model developed by Kiva.  There are a growing number of crowdfunding websites available.

The process of seeking funding is quite simple.  From their website:

Every project has a funding goal (any dollar amount) and a time limit (from 1 - 90 days) set by the project creator. When the deadline is reached, there are either of two results:

1. Funding Successful: If a project has met or surpassed its funding goal, all backers' credit cards are instantly charged and funds go directly to the project creator. Project creators are then responsible for completing the project and delivering rewards as promised.

2. Funding Unsuccessful: If a project has NOT met its funding goal, all pledges are canceled. That's it.

Funding projects is also quite simple, using Amazon as the method of payment.  "Investors" are not charged unless the project meets its full funding goal.

Like any funding source, Kickstarter focuses on a niche.  The deals they support are all various types of creative projects including films, music, publishing and gaming.  Christina Warren profiles a few of the deals funded through Kickstarter in an article yesterday at Mashable.com.  Some pretty cool projects are finding life through Kickstarter. 

The "investors" often become customers, getting copies of the creative work when it is completed in exchange for their financial support.

Don't you just love it when free markets are left alone and allowed to work?

Paul Kedrosky has made some waves with his analysis of the "super-seed" funds that are sweeping the investment world.

These are the funds that are spreading small seed investments over a large number of start-up firms.  Many of these funds are backed by the same angel and VC folks who are not having much luck these days with their traditional rifle-shot large investments with a very few select new ventures.  So they are trying a new business model that is based on more of a shotgun approach to venture funding.  We have a new seed fund here in Nashville called JumpStart Foundry.  We are hosting the meetings of this group at Belmont University.

JunpStart Foundry is seeing a variety of deals.  But, like most super-seed funds, we are seeing lots of "I have an app for that" start-ups or new ventures dealing with some sort of mobile gaming app.  And that is where Kedrosky seems to start wringing his hands just a bit.

"[In] the rapid rise in the number of seed-centric firms across the country, but especially in the Valley, you see a classic (eventual) overshoot going on, in ecological terms. A host of well-adapted and fast-growing organisms, perfect for the current funding environment, are emerging in a hurry, driven by need, incumbent stupidity and low marginal cost of super-angel creation, with the result, sooner or later, almost certain to be a population crash. Arguing otherwise requires you to believe that this time is different -- perhaps supply creates its own demand, or the consumer opportunity is far bigger than it looks, etc. -- and that is a tough case to make."

Relax, Paul.  It will be OK.  Remember that even the dot.com bust was really only a Wall Street bust.  The only lesson we seem to take from the dot.com period is that investors are prone to feeding frenzies that almost always lead to a market crash.  But out of the dot.cim frenzy came a lot of innovation that led to some amazing creative destruction.  And this did eventually lead to real economic growth with the few dot.com's that actually had sustainable business models (that means "profits" for those of you in Silicon Valley).

This is what free market capitalism does during times of great uncertainty.  And while from the micro investment perspective it seems irrational, or "stupid" as Kedrosky puts it, this is the fundamental force of economic transformation and growth.

Is it risky?  You bet!  Will investors lose money?  Many of them will over the short-term.  Will some of the super-seed funds fail?  Of course they will.

But out of this will come the true seeds of growth. 

We seem to think of the "seed" metaphor in the wrong way.  It is not those neatly packaged hybrid seeds we buy at the garden store that get planted in rich manure to which we add lots of water from our irrigation systems.

Instead, we should think of these seeds like acorns.  Hundreds or even thousands get dropped by an oak tree each year, but only one or maybe two will ever have everything happen just right so that they grow into a new oak tree.

But here is the thing we all should really worry about right now.  Washington through massive tax hikes and increasing regulation is talking away all of the fertile soil needed for those acorns to germinate, sprout, and hopefully grow to maturity.

We need to leave the seeds of economic creative destruction alone and let the free market do what it does best.  Then a few of these seeds will germinate.  No one knows which ones they are, but when they do it will lead us to our next period of sustainable market-based economic growth.

In their rush to control everything they can get their arms around in our economy, legislators in Washington may be moving toward a banking overhaul bill that will throw even more cold water on an entrepreneurial recovery for the economy.

The bill paints with a broad legislative brush, punishing small community banks for the sins of a few of the biggest national banks.  At the point when small businesses would be starting to grow in a recovery, provisions in this bill would render community banks would be much less able to help with financing.  Since community banks are the lifeline of small businesses, this does not bode well for any possible recovery anytime soon. 

From the Seattle Times:

Although small banks would be exempt from much of the overhaul, the provisions that would apply would make it harder for community bankers to serve their customers and to expand lending, financial-industry groups say.

The proposed rules could overload many community and independent banks, said Nancy Sheppard, chief executive of Western Independent Bankers, a trade group in San Francisco.

As a result, she said, the massive overhaul would create difficulties for two segments of the banking industry: the "too big to fail" and the "too small to comply."

The Fort Worth Business Press offers one example:

For example, the legislation will impose unlimited assessments on all financial companies, including home and auto insurers and property and casualty and life insurers. Even dentists and other healthcare providers, could fall under the bill because they often allow their patients to pay in installments. Rep. Nydia Velazquez, D - N.Y., chairwoman of the House Small Business Committee, has gone on record as saying that it is "more than likely" that small health care practices, such as dentists and physicians, would fall under the scope of the new regulator. She quoted from a recent Federal Trade Commission decision that said dental and law practices are considered creditors.

So, then, are plumbers, butchers, grocers, to name a few. And, one of the industries hardest hit in the economic downturn--construction--is very concerned about the bill. The Associated Builders and Contractors believes that another federal bureaucracy will lead to additional paperwork and record-keeping requirements for small businesses.

Here is an ABA summary of all of the potential detrimental impacts on community banks from this bill.