Growing your own business can be exciting, but it’s also extremely challenging.
One of the most challenging and most important aspects of entrepreneurism is learning how to navigate your financials. Immersing yourself in your business’s financials is the best way to see how money flows in and out of your business and gives you an accurate snapshot of how well the business performs. Staying on top of your finances means you can avoid unforeseen business debt and have enough money to invest in and grow your business.
Here are five of the best tips our expert advisors offer on how to stay on top of your finances:
- Understand your cash flow. Regardless of how well your business performs or how profitable you are, your business can’t survive without proper cash flow management. Think of cash flow as the lifeblood of your business. You’ll want to keep a close eye on how money flows in and out of your business. Salaries, billing schedules, and fixed costs all affect cash flow, and you need to anticipate when money might be tight. Analyzing cash flow on a six- to twelve-month basis will give you the vision and predictability necessary to make your business scalable. (We have a tool you can use to manage your cash flow a little easier).
- Chase profit, not revenue. This relates to cash flow, and it’s something many entrepreneurs get wrong, especially in the early stages. Many business owners will see the sales number without considering the true cost of goods. Remember, all goods/services must be priced high enough to cover both direct and indirect costs. Think about which ideal customers can drive more profit consistently.
- Automate invoicing as much as possible. If you have recurring services, set up monthly recurring payment terms – this will speed up your cash flows, reduce churn, and save time. If your services are project based, have systems in place to ensure you’re pricing accurately and getting invoices out on time, then setting auto reminders if someone is late to pay.
- Pay Yourself First. You most likely didn’t become an entrepreneur just to have a “job” so don’t treat your business as such. When forecasting your finances for the next 3 years (yes, the next 3 years), ensure to budget your own salary, even if you are just starting out. Often, owners think they get “what’s left over” as their salary, but if you budget for all expenses including setting a realistic budget for your own worth, it sets you and your business up for success and the mentality of running a business and having control of your profits.
- Work backwards. Do you need to know how much revenue you need to make to cover a new hire's salary? Or how much revenue you need to make the desired profit? Or even how much revenue is needed to justify a new capital purchase? Our expert Advisor Tina Moser loves using an extremely simple profit to sales calculator, to work backward and determine the revenue needed for any purchase, hire or desired profit.
Having a better understanding of your financials can go a long way to better manage and monitor your business’s health. If numbers aren’t your thing, and you don’t know where to start, you don’t have to go at it alone. Schedule a free two-hour session to dig into your business and develop a plan.