If you want to build a sustainable business, one of the most important things that you can do is learn how to establish a solid financial foundation.
For a lot of people, numbers just aren’t their favourite.
Maybe you’ve never been a math or numbers person, or maybe you don’t really like dealing with your personal finances and so you’ve been avoiding your business finances in the same way.
But a little bit of tough love here – those problems are never going to sort themselves out by avoiding them.
Today we’re going to talk about some of the basic principles that you need to have an understanding of financially in order to be able to grow your business.
How Much Money Do You Make?
I’ve had the pleasure of working with dozens of different business owners, and one thing that I see coming up over and over again is a lack of understanding how much money they’re actually making.
Most people do, of course, understand what their revenue is – since that’s the exciting number everybody likes to talk about – but in terms of the actual profit they’re making every month, there tends to be a bit of a gap.
One of the reasons that this is problematic is it makes it really difficult for business owners to know how much to pay themselves.
And if you’re not paying yourself in your business and you’re not making any profit, you actually have less of a business and more of just a really time consuming hobby.
To set yourself up for success in this arena, there are four important things you need to consider as you’re starting out:
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1. Completely Separate Your Personal and Business Finances
This means separate bank accounts, separate PayPal accounts, separate credit cards – everything.
You need to make sure that all of your expenses are completely separated out, so if you’re buying anything for your business, it is only coming out of your business funds.
I would also really encourage you that if you’re not great at handling your own personal money, or if you really have no desire to learn about bookkeeping, hire a good bookkeeper as soon as you can afford it.
They will help you to keep things on track and ensure that you always have your numbers available.
2. Know Your Expenses
In order to be profitable, you need a really good understanding of what your expenses are and how much it actually costs you to deliver the product or service that you deliver.
This really needs to take into account everything that goes into it.
Depending on the type of business you run, this can include things like software, contractor payments, fees, subscriptions, etc. You need to take into account everything that goes into delivering your product or service.
Another aspect of this that a lot of entrepreneurs skip over is – how much money does it cost for the business owner to be a part of delivery. Most people who start businesses are really good at bootstrapping, and probably did everything in their businesses at some point.
One of the dangers of that, though, is we start to devalue our time and not recognize how much it’s actually worth. So when you’re establishing how much it cost you to deliver a particular service, you want to take a look at how much it would cost to hire somebody to replace you for the part you play in delivering that service, and include that in the overall delivery cost.
A really important element in determining how much it will cost you to deliver is knowing how much total time – both yours and your team’s – goes into that product or service. A great way to do this is to do time tracking.
It’s vital to complete time tracking over several iterations of this exact same project, so you can know quickly at a glance how long it takes to really deliver that particular thing.
This benefits your business in a couple of ways. It ensures that you’re actually profitable for what it is that you’re offering, and it also enables you to give really quick and accurate quotes when people come to you looking to have that same service fulfilled for them.
3. Are Your Revenue Goals Realistic?
I encourage you to take a close look at your financial goals and determine if it’s actually realistic for you to hit them with the type of service or product that you’re currently offering.
For example, let’s say you offer a service that is $1,000 per month, and your goal is to hit revenue of $10,000 per month. That means that you need 10 clients at $1,000 a month to reach your $10,000 goal.
But once you start time tracking, you might realize that the amount of time to deliver for each of those clients is a lot higher than you thought. Maybe it takes 40 hours per month per client, which at 10 clients, brings the number of hours to 400 per month.
You’re obviously not going to be able to handle that on your own – unless you’re working 100 hour weeks! – so you have a couple of options to consider.
Obviously, you’re not going to be able to handle those on your own unless you want to work 100 hour weeks – which I certainly hope that you’re not – so you have some options that you can consider:
- You could for example, begin to hire some team members that could help you deliver some of those clients needs.
- Another alternative is to look at raising your prices so that for that same amount of work that you’re doing, you’re actually getting more money per client per month that will help you to reach those revenue goals.
- Or it might be time to take a really close look at what it is that you’re actually providing for that service. Is there a way that you could structure your packages differently? Is there a way that you could make your service more efficient, so it would take less of your hours? There’s a lot of things that you can do in terms of your offer to make sure that you are setting yourself up to actually be able to hit the goals that you want to in terms of revenue every month.
I encourage you to go and speak to a knowledgeable accountant who can help you to figure out how much of your money you need to be putting aside for taxes every month.
You definitely don’t want to have a surprise in the spring where you have an enormous tax bill that you weren’t expecting!
4. I Have Profit! Now What?
Once you have a really good handle on your expenses, and how much money you should be setting aside for taxes along with what you’re going to be paying yourself monthly, you’ll start to have profit that’s building up in your business.
Rather than just taking that money out and spending it, I’d really encourage you to set some of that money aside in a special savings account that is used only for emergency purposes, just like you would in your personal finances to build up a bit of an emergency fund.
Three to six months of expenses is a really great idea to have on hand, so that when something unexpected comes up, it won’t sink your business.
There’s lots of different things that can come up unexpectedly from things like clients not paying their bills, or maybe you have a slow month, or maybe you’re unable to work for a particular time period, or you have an unexpected chargeback.
And we want to make sure that that doesn’t have a significant impact on your business, and that those surprises become inconveniences and non emergencies.
Knowing these numbers informs all of the decisions in your business, who you can hire, how much you can pay them, if you can give yourself a raise, how much you should be charging your clients, and more.
I hope that this information has empowered you to take the next step to shore up your business finances.
And I would love for you to let me know in the comments below how you feel about numbers. Do you love them or hate them?
