A company with a great product and great management may go through four stages of financing: "MCI"-better known as "friends and family," "Angel," or "seed," VC, and M&A/ IPO. Before you can raise money, you must have your financial records completely in order.

Having had the opportunity to assist many startup companies with financial modeling, financial strategies, and preparing for different rounds of financing, I want to share my knowledge of five critical financial pitfalls that can trip you up before you even start.

1-Things never happen as fast as you think.
Every CEO believes he or she knows how long it will take to fund the different stages of a company's development. Take your realistic timeframe and multiply it by a factor of three or more. This means you must have enough money to carry you longer than you think. Many great ideas never see the light of day because the company owners run out of money before the next round of funding is consummated. Investors never have the same sense of urgency as you do. They are busy and looking at a lot of different deals. Besides, they will see how management reacts during financial duress.

What to do? For example, during the MCI stage of development, make sure you have credit and cash sources to carry you for at least six months or more. For later rounds of financing, assume it will take 6 to 12 months longer than you assume. This means you must stretch every dollar three or four times farther than you anticipate. Ask yourself this: Do I need to spend that dollar today? What are my alternatives?

2-Keep comprehensive financial records.
Financial accounting is an excellent management tool, yet few startup businesses consider how important it is to have good accounting records from the first day they commence operations. Some companies operate their accounting using a spreadsheet or posting transactions every four or five months. When it comes time to attract an investor, the company scrambles to assemble financial records. Investors make some major value judgments about you and your company based on the financial information they are presented.

That information tells a factual story about a company's management and the individuals that constitute it, for example:

• How they allocate scarce financial resources-which says a lot about their judgment.
• How disciplined they are.
• The kinds of choices they make.
• Whether they operate consistently.
• The kinds of controls they have in place.

So simplify your life. Consider using a product such as QuickBooks Pro 99 from day one, and have a financial professional help set up your accounts. This will get you off to great start.

3-Cash flow is king.
Cash flow is a picture of how each dollar has been spent. Great CEOs learn how to read, understand, and operate their business using a monthly cash flow statement. It is one of the most important statements a CEO can receive to manage the business.

4-Spend time putting together reasonable projections.
This one covers a lot of ground. Here are just a few examples:

• Pay yourself and your managers a reasonable wage. Balance security with equity. Your team must feel secure while participating in the potential upside. This will help you maintain your critical talent.
• Assume you will have major competitors. If you have a great idea, others will rapidly join in.
• Find out how much your customers will pay for your product. (For a process you can follow, go to http://www.indsoft.org/Newsletters/nws0199.htm#leading company.) Charge at the high end of the range. Competitors will force prices down.
• Many startup entrepreneurs believe they can capture 55 percent of their market within the first 18 months. The reality is you will be lucky to capture 2 percent. Investors will lose interest quickly if you're too optimistic. They invest only in managers with realistic expectations.
• Challenge your assumptions. Take your original business projections and delay cash inflow from sales by 60 to 90 days. Prepare a contingency plan based on the resulting lack of cash. Investors look for a management team that has thought through potential pitfalls.
• Your projections will undoubtedly show huge sales growth. The problem is growth creates myriad complications. How are you going to hire people and integrate them into your company quickly? What management resources will be sucked away to accomplish this process? How is customer service going to be handled and at what cost? How will the distribution channel change and at what cost? Does your management team really understand what lies in front of them? What is your current culture and can it support a company that may grow at 80 percent a year?
• Companies go bankrupt because they grow too quickly.

5-Track to your financial plan.
Track your expenses monthly and put them in a spreadsheet. This is the fastest and easiest way to identify any adverse operating trends. It also gives you a fast and easy way to highlight and zero in on those expenses that are getting out of control. You want to focus on trends instead of one month's results because you may have had an anomaly. For example, a utility bill may be received late one month and then a current bill all received in one month. This would have the appearance of a utility charge that is out of control. A monthly expense tracking spreadsheet would immediately show that expenses were in line and appropriate.

Record-keeping excellence and well thought-out financial strategies will help attract investors to your world-beater company.

The world is ripe for your world-beater ideas and applying some financial nuts bolts early on in your company's development will help smooth the drive toward your success.