Michael Majeed is a longtime financial services executive and consultant based in Toronto. As a senior financial consultant and regional sales manager at Arck Innovative Consulting Corporation, a leading SR&ED tax credit firm based out of Markham, Ontario, Majeed is involved in all aspects of sourcing, originating and identifying mid- and large-sized Canadian corporations requiring advisory and consultation services in the area of scientific research and experimental development (SR&ED) tax incentive program. An accountant by background, he enjoys helping clients receive substantial tax refunds.
But it’s not only major corporations that grab his attention. Michael Majeed is quick to note the vast numbers of new startups that launch each year on the Canadian landscape, and he’s keenly interested in helping young business owners make the most of their opportunities, especially when it comes to their finances.
Majeed says that while most entrepreneurs launch companies with great ideas, lots of ambition and the most sincere of intentions, it’s equally important to have a strong handle on their finances.
Financial intelligence is important to anyone starting a company. Many companies seek angel investors, venture capital and even family and friends’ money when they’re planning to start a company. Realistically, how much should a new business owner plan to have on hand before opening his or her doors?
Michael Majeed: When starting up a business, the most important thing to remember is “be realistic.” Naturally, you’re going to have high expectations for your company, but my best advice is to start small and gradually work toward your goals. While every type of business has its own financial requirements, (i.e. office space, legal fees, payroll, etc.) an entrepreneur should have about 6 months worth of fixed costs on hand at the beginning. Additionally, take time to plan your costs and don’t underestimate expenses – they will likely increase as your business grows.
Once the company is open, in general, how long does it usually take to break even or generate a profit, and why?
Michael Majeed: In all probability, it takes 2-3 years for a new business to start showing a profit – but that doesn’t necessarily mean that you are doing something wrong. As an entrepreneur, you may be able to take an income from your start-up even when on paper, it’s making a loss. Investors can also profit at a fixed interest rate, regardless of how the company is doing. The actual time frame of profitability depends on how much start up capital is needed at the onset and how much is drawn for compensation.
In the last several years, we’ve seen a number of new online services and software that are designed to help business owners track their income and payables. What kinds of habits should an entrepreneur cultivate so that financial management is done in an ongoing manner?
Michael Majeed: Financial management is crucial to the success of the business. An entrepreneur should always know their numbers and check on them frequently. When the business is up and running, they should tightly manage its financial performance by creating a budgeting process and reviewing the business plan regularly for performance. Precise planning makes a difference in that it allows the entrepreneur to improve profits, reduce costs and increase ROIs.
What should business owners look for on their weekly or monthly balance sheets that might be red flags telling them to make changes in how their business practices?
Michael Majeed: Entrepreneurs should follow the old adage, “numbers don’t lie.” Numbers can indicate profitability, but they can also show the first signs of financial trouble. What are some things to look out for? For starters, rising debt-to-equity ratio. This indicates that the company is incurring more debt than it can handle. Next, unsteady cash flow. While cash flow is a good sign a rule of thumb is that it should be a flow, back and forth, up and down. Additionally, a declining profit margin is cause for alarm. The profit margin must account not only for the costs to produce the product or service, but the additional money needed to cover operating expenses, such as costs of debt.
What are the essential things an entrepreneur needs to know to be able to accurately project profits and losses into the future?
Michael Majeed: When projecting profits and losses, an entrepreneur needs to start with expenses, not revenues. Forecasting business revenue and expenses during the startup stage with a degree of accuracy takes a lot of time, investors will not put money in your business if you’re unable to provide a forecast. Take into consideration: a financial forecast will help you develop operational plans that will ultimately help make your business a success.
What are the most important things an entrepreneur should do throughout the year to make tax time go as smoothly as possible?
Michael Majeed: Good habits go a long way to prepare for tax season. Keep a paper trail of all expenses so that you can easily hand them off to your tax accountant. Set up a calendar reminder to pay your tax installments on time throughout the year. Keep detailed records of your capital expenditures and always keep track of your business deductions. Most importantly, get professional accounting advice if you don’t have a bookkeeper on staff.