Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.
Whether you’re bootstrapping, have accepted a loan, or are being financed by investors, money – and how you use it – matters. Every business must have a budget, and while that concept may, for some, imply a degree of penny-pinching, others correctly view it as a path toward rationalizing their spending.
Too many businesses fail for a lack of funds. Intelligent financial management is one of the most critical components of business success. While it won’t compensate for a bad idea or poor implementation, it can help to indicate when a course change may be necessary or, conversely, when you’ve begun to find success. Financial management is also invaluable for both meeting obligations to creditors and realizing your own business goals.
Here’s what you need to know about financial management as an entrepreneur:
Budgets Are a Must
While I’ve already mentioned budgets, I’m going to continue on that theme because budgets are such an essential tool for keeping expenses in line. Combined with accurate financial reporting, a budget can help you to better determine exactly where your money is going vs. where it should be going.
We tend to regard budgets negatively, as though they’re somehow limiting our ability to spend . We’d be far better served, instead, by regarding budgets as a vital planning tool. A well-made budget will reflect both income and expenses and help to provide a blueprint for future financial well-being. Effective budgeting can help you to conquer ambitious goals and to ensure that you’re prepared to meet large expenses. It can also help companies to manage periods of low cash flow.
A budget helps to paint a picture of just how you intend to use available funds and so reflects the your business’ goals. For example, if you’re working to ramp up product awareness, your marketing budget may expand for a few months. Having an awareness of this plan will enable you to cut back in other areas or otherwise plan to accommodate that departmental funding increase.
A well-made budget will include both one-time costs such as equipment purchases and fixed costs such as rent.
Think of a budget as a financial snapshot crafted utilizing the best available information, though with the expectation that time and additional data will inevitably necessitate changes. It’s important to revisit your budget at regular intervals in order to ensure that you’re working with the most current numbers and are always making informed decisions. It’s wise to revisit a budget – even in advance of your regular review interval – whenever you aren’t meeting projections, are faced with additional expenses, or are working on new goals.
Keep Good Books From the Start
Despite accounting and bookkeeping being commonsense aspects of owning a business, for many small business owners, they can be an afterthought. Daily operations are the primary concern and receipts are simply shoved into a folder for later attention.
While this may suffice over a short period of time, continuing in this manner is really doing yourself a considerable disservice. Keeping an accurate accounting of expenses and income is essential in order to ensure that your overall efforts are not in vain. Understanding the cost of providing your service is absolutely necessary in order to set effective pricing. The only means of generating this information is to maintain a record of everything – every penny spent on business-related items and every penny earned.
Exactly how you decide to keep your books is up to you. You may prefer a simple spreadsheet or opt for small business software. Alternatively, you might choose to hire a professional bookkeeper so that you’re free to focus your attention elsewhere.
Keeping track of your income and expenses will enable you to more fully grasp how well your business model is performing and may also provide you with information on aspects of your business requiring greater attention. Additionally, for companies with aspirations of scaling, having a complete record of income and expenses may eventually help to meet the requirements of future goals such as a merger or IPO.
Review Your Numbers
Depending on your specific enterprise, the frequency with which you’ll need to review your numbers will differ. Some businesses examine their numbers throughout each day, while others may benefit from doing so on a weekly basis.
A review of various metrics may serve to provide you with a sense of what’s happening in your business. Sure, you probably have an anecdotal notion of day-to-day operational details, but having data that explicitly indicates the sources of income and disposition of expenses will invariably help you to make more informed decisions. While the metrics you choose to track will vary based on your particular business, you may wish to consider examining these: average sale per customer/client, average daily sale, and daily net profit. You should also identify which of your products or services are performing well and which aren’t. Is a particular item not selling at all? Having a working knowledge of these facts can inspire a decision to run a marketing campaign, move an item to an area of greater visibility, alter the sales team’s focus, or perhaps even cut your losses entirely.
Set Realistic Goals
Throughout the life of your business, you must consistently set realistic goals and create pathways for achieving them. Many of those goals will have financial components to be budgeted and measured. For example, in order to ramp up production of your gadget, the production budget will require an increase and marketing might also merit an allocation of additional funds as product availability scales.
In this example, a realistic goal might tie sales to a time table reflecting the additional costs of production and marketing. Benchmarks based on previous sales will help to provide insight on the time required to move the additional units. Consistent monitoring of actual sales will indicate whether the company is on target to meet its goals or whether its sales – and its budget – must be adjusted.
Why must the budget be adjusted? If fewer gadgets than expected are being sold over time, the expected level of income isn’t being earned. This difference between expected income and actual income must be considered in order to make the best possible business decisions.
Understand Your Cash Flow
Every dollar matters to a startup. Achieving a complete understanding of cash flow – of how much is being spent and of how long it takes to see a return – is essential in order to remain afloat as a viable concern.
Some businesses experience seasonal cash flow issues where they’re not generating sufficient income to cover their fixed costs. Landscaping businesses are a prime example. Depending on geography, landscaping isn’t necessarily a year-round business. In northern climes, landscaping businesses must ensure that they save enough during high cash flow periods (summers) to cover expenses during low cash flow periods (winters).
Time is Money; Know When to Delegate
Your time is valuable. In order to make the most of it, you must carefully consider which specific activities are worth your time and which should be delegated to an employee or freelancer. For example, while your business remains small, it may make sense for you to handle the bookkeeping responsibilities. Once you’ve grown a bit larger, however, having someone else handle those chores will likely represent a net savings.
Businesses now have more options than ever before. While accountants are still widely utilized, many businesses also partake in the “gig economy,” hiring freelancers to do their books. Rather than hiring a part-time or full-time bookkeeper, contracting with a freelancer enables many businesses to save money. Freelancers are especially useful for one-time projects and or those with varying hours.
Depending on your business, you may find that bartering is a useful way to compensate a professional for his services. For example, if you repair computers, you may offer to service a CPA’s systems in exchange for accounting help.
Too many businesses fail as a direct consequence of poor financial management. Don’t permit financial troubles to be the downfall of your startup. Ensure that you’re smart with your finances so that you’re always in a position to adjust as/when necessary and to grow when you’re ready. Budget, keep track of income/expenses, review your numbers, set realistic goals, and delegate when necessary in order to maximize your potential.
About the Author
Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (www.GoodField.com).
Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.
Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to www.JoeJohnson.com.