Make No (Financial) Mistake About It!
If you put 10 successful business owners in a room and ask them to talk about money management mistakes they'd made over the life of their business,es they'd probably be there all night and still not have run through them all.
Why? Because in business as in life, people make mistakes. Not all your decisions will be the right ones. Even so, by keeping an eye on a few key areas and hewing to a few well-proven rules you can limit those costly mistakes.
This month I'm going to take a look at business finances through a prism that splits the light into three categories: planning and organization, cash management, and getting paid.
PLANNING & ORGANIZATION
This is the most obvious and seemingly rudimentary of all the categories. Yes, of course, you have to plan. Everyone knows that. And yes, getting (and staying) organized can help your business avoid serious money mistakes.
As a small business owner, it's really important to have a good overview of your business. Good planning and organization makes that possible.
The first thing to keep your eye on is your business plan. If you've got one it's important to revisit it regularly to see if that plan is working or if you need to rethink some aspects. If you don't have a plan, it's never too late. A good business plan defines what you want to do, where and when you want to do it, and how you're going to go about it. This is where you set your goals and spell out your best estimates as to what it will cost to run your business.
As time passes and your business grows, shift your focus a little more heavily towards your budget and spending priorities. Set up an annual budget (if you don't have one already) and run comparisons between budget and actual spend on a month to month basis. This allows you to prioritize purchases and investments and can help prevent dipping into working capital.
(Check out these Business Planning & Financial Templates from SCORE for a good starting point.)
To make sure everything keeps running smoothy, be sure to have good bookkeeping and accounting practices in place. If you don't track your income and expenses you won't know if or why your business is succeeding or failing. If you mix personal and business finances you will not only have no idea what's going on with your business, you also risk finding yourself spending days at an IRS audit, helping them with their inquiries.
CASH FLOW MANAGEMENT
You've heard it before...cash flow...lifeblood...yadda, yadda, yadda. I know it's repetitive, but it's true. Without cash you can't continue to run your business. End of story. So, what are you supposed to do about the reinvesting into your business everyone tells you to do? How about your retirement fund? And how much should you pay yourself?
Making sure you have enough cash on hand is the primary goal of cash flow management.
While you don't want to waste investment and growth opportunities, it can be far more dangerous to over-invest than it is to under-invest. A sudden change in market or circumstances and you could find yourself having to choose between putting your company at risk trying to juggle payments and commitments, or taking a bath by cashing in on investments or your 401K.
One of the biggest mistakes small business owners make is mixing personal and company finances. My advice: don't do it.
First and foremost, when you confound business and personal expenses (and income) you can't tell what you need financially to survive versus what your business needs. It also makes getting ready for tax season a nightmare. If you've been too sloppy and can't untangle the two, when the IRS questions everything you might find yourself racking up whopping great penalties and fines, all because of a simple mistake on your part.
Getting paid is the ultimate end goal in business. Sounds simple, right?
Getting paid by customers. Getting paid for all the work you do. Getting paid yourself. And, getting paid for doing all that while you stay engaged with your customers, keep up with industry trends and deal with all those day to day surprises that being a small business owner inevitably brings your way.
Getting paid by customers tarts with a solid Accounts Receivable system coupled with good follow-up. (See my blog A/R: It's Also Good to Receive for some helpful tips on setting up an Accounts Receivable system.)
Now, getting paid for all the work you do is another thing. Small businesses often underestimate the amount of work they'll have to do to meet a client's expectations. Knowing what you'll be doing and being efficient at it are equally important.
It doesn't matter if you run a custom wedding cake shop or a mid-sized web development firm, if you haven't fully defined the scope of work you'll be doing or if you haven't invested in your team, you may find yourself doing twice as much work as originally planned.
Another part of getting paid is remembering to pay yourself, but not too much. Entrepreneurs and small business owners often vacillate between starving themselves to feed their businesses and pigging out after an off the charts quarter. Neither is good for you or your business.
I suggest you follow your grandmother's advice: moderation in all things. While there may be times when you need to tighten your own belt to take care of your company, you can't live forever on nothing. On the other hand, don't count your chickens before they're hatched. A banner quarter or sudden windfall could be just that, short and sweet and rare, so wait until your cash reserves are sufficient before you pop for that shiny new delivery truck.
THE BOTTOM LINE
A problem arises when we confuse knowing that something is important with knowing how to do it. If business and financial planning were innate capabilities there'd be no need for business schools, tax consultants, bookkeepers, project management plans, financial advisors, and so on... If you're not an expert in these areas, I strongly encourage you to get advice and help from someone who is.
Follow us this month on Twitter as we explore these three aspects of money management.