As an entrepreneur, you’re the one who plays the strongest part in how your company’s finances are managed. Of course, your bookkeeper or accountant will have a say but the final word comes down to you in the end.
It is a universal yet difficult truth that a lot of our clients find difficulty in digesting. However, the faster you accept the financial responsibility of your business, the sooner you’ll find yourself able to make clearer, smarter, and more confident decisions that will see your business grow into the enterprise you’ve always dreamed of making it.
Embracing this role can be a huge shift that will have you examine not only your company but yourself as well in the process.
1. Recognize the Value of Money
We all have a different approach to money. Regardless of if you’re conscious of it or not, the relationship as well as the financial responsibility you assume because of it all play a big part in how you manage the financial aspect of your business. It's probable that there is a lot you don’t know about how to relate to money and accepting this is a good place to start.
Overall, how our approach to money is defined by the values we learned from the authoritative figures we had when we were kids:
“I don’t believe in the concept of debt.”“Do you think money grows on trees?”“Money is not necessary as long as I’m doing what I adore most.”
What did you learn about money as you grew up? Were matters of finance a strong topic of discussion within your household? These values whether they were innate or developed as you grew older, are what influence your financial decisions either consciously or unconsciously.
Try to learn the true values of money. If there are those that affect your business negatively are getting in the way of progress, work to identify and correct those sectors.It's of utmost importance that you identify your financial personality.
In general, we see our clients take on three basic financial styles:
The Monk who is detached and does his best to avoid having to interact with money.The Spender who simply cannot have money in their pocket not being used.The Hoarder who has a more restrictive approach when it comes to spending.
Which one of three do you relate with the most? Regardless of your attitude, approach, and understanding about money, one style has to be dominant. Whichever style it may be, you’ll find that it defines your overall relationship with money and this will show in how you manage money in your business.
You need to ask yourself a series of questions:
What effect does your attitude to money have on your business?What knowledge or beliefs concerning money would you like to change within yourself?Are there any financial attitudes that you might have noticed in your subordinates that are a result of your own basic style and attitude?
Being honest with yourself while answering these questions will allow you to move to see the reality of the state of your finances.
When it comes to money, we tend to look more into the past (our previous interactions with money) or the future (what we think or fear might happen), and not the present time. If your vision of business finance is through this detached lens, your beliefs are being guided by perspective and not reality which is risky because misinformed decisions can lead to very unfortunate results.
2. Be Constantly Aware Of Your Financial Position
You can and must be an expert at managing your own finances. You need to understand your financials for the security it provides your company and the control you’ll gain over decisions that you will eventually make for your business.
Two partners opened a dental practice but they were not as financial-savvy in business as they would like to be. They only wanted to handle the dentistry aspect of the business and not engage with the financials. So they delegated the work of managing the money to an administrative assistant—who unfortunately knew almost to nothing about finance. She barely knew how to use a simple tracking program such as Excel.
Before the time the partners realized, they had been convinced they were losing money and needed to shut down their practice. Only after closer introspection did they see that wasn't true. They were actually making profits but the finances were so poorly managed that it didn’t occur as though they were gaining anything. Their ignorance of finance nearly cost them their practice.
Understanding the Difference Between Cash Flow and Profit
Experiencing either losses or profits is normal. It does not mean that you will go out of business if you run losses for a few months. Going broke is more difficult to recover from. The distinction here is between cash flow and profit.
Just because you recorded profits for a month doesn’t mean you had a positive cash flow month. Likewise, having cash in the bank doesn’t mean your business is successful. Cash flow, as well as profit and loss, have to be analyzed closely. Before my client and I began working together, her financial system involved her simply checking her bank account. This worked for a while until a check bounced. In her desperate attempts to fix the issue, she found out that her company was losing money at staggering rates and it was only becoming clear in her cash balances.
So how can you avoid running out of money?
- Enough cash reserved to cover 3 to 4 months' worth of expenses.
- A cash plan and forecast that guides your decisions.
- Strong knowledge of the difference between profit and cash.
As a small business owner, your cash accounting system may only involve recognizing revenue present in the bank. What you should understand is your profit or loss and cash flow are not the same things.
If you want your business to grow, you will need to eventually make the transition to an accrual accounting model. This model will let you know more about the financial affair of your business by allowing you to track business financial activities. By showing revenue and expenses you will have a clearer picture of where your business stands financially.
Create a Cash Forecasting System
As was made evident with my client, cash is your important asset. It’s the generative capacity of your business. Therefore, you need a cash system that will allow you to predict your cash flow as accurately as possible. This may begin as a daily forecast, but it could turn into a weekly or even monthly system depending on your needs.
You can build a cash forecast on Microsoft Excel or an alternative cash management tool. The first time you set up your forecast, everything is reliant on numbers from previous transactions and theoretical estimations but with each passing month, you will learn more about the accuracy of those assumptions. Ask yourself these questions:
What was wrong or right about your assumptions?Was this factor a “one-time incident”?How can you refine your forecast based on what just happened?
The cash flow forecast, combined with your profits and losses, will paint a more accurate picture of the financial stand of your company. More importantly, it will give you the in-depth insight you will use to make better business decisions.
3. Know Your Value And Stand For It
Clients do not always stand for the value that they actually deliver. When certain clients do their invoicing, they feel as though they have to apologize to their customers. I tell them that a customer relationship is based on a value-for-value transaction.”
Confidently requesting payment can be hard, especially for owners who prefer to avoid the topic of money. However, in the end, having a clear and simple billing agreement is a bold statement of how proud you are of your business.
Good customer relationships are founded on the premise that you’re providing a service, and your customer is paying for that service. Once that’s clear, you’ll not only manage your money better but your relationships with your customers as well.