What’s more exciting than starting your own business? Your mind races 24/7 with ideas about your product line, marketing concepts, sales strategies and hiring your A-team. But in the midst of all that, there’s a vital aspect of entrepreneurship that often gets overlooked: finances.
A company’s finances dictate success or failure. Skyrocketing sales and a brilliant product road map won’t matter if fixed expenses are too high, you’re spending money in the wrong places or ignoring basic rules of cash flow- so now is the time to get your finances right.
Here are six must-know finance lessons for early-stage entrepreneurs:
1. Build two budgets
While budgeting may sound like an exercise in frugality that you hoped to avoid, it’s vital in every entrepreneur’s toolkit.
Without a business budget, you’re guessing about costs and income with no data to guide future planning. Your expenses can go unchecked, leaving you with less cash than expected. Budget specifics will be different for every business; however, the need for a budget is universal.
Be sure to include line items for everything from taxes to labor costs to rent. Don’t forget smaller expenses like replenishing your coffee supply and client gifts.
Don’t stop there. Creating a personal budget provides entrepreneurs with added predictability and may help you weather downturns. There are plenty of budgeting apps available, so find one that you’re likely to use-and stick to your plan!
2. Hire a finance professional
For entrepreneurs who glaze over when discussing budgets and balance sheets, consulting with an accountant or bookkeeper can be more cost-effective than attempting to manage finances on your own.
When calculating taxes, monitoring cash flow or choosing a cash reserve amount, finance pros have the education and experience to identify threats and challenges you might otherwise miss.
When choosing an accountant, ask about their experience with entrepreneurs. It’s a best practice to select someone who is well-versed in the unpredictability and limited resources that startups may encounter.
3. Know the value of your time
Throughout the workday, ask yourself two critical questions:
- Is this the best use of my time?
- What is the ROI for this activity?
It can be helpful to calculate your “hourly rate” based on the value of your skills and the average revenue you generate in an hour’s time. If your hourly rate is $90, hiring a digital marketing consultant for $50 per hour makes sense. While he or she polishes your social media reputation, you can prospect for new clients or pitch investors–potentially higher-ROI activities.
Budgets and time constraints will sometimes force you to engage in tasks that are below your “rate;” that’s normal for any business. However, knowing the value of your time can help you make better decisions on delegating or outsourcing.
4. Minimize fixed costs
Although a well-decorated office in a bustling location communicates success, the reality is that you should minimize fixed costs wherever possible.
Instead of renting your own offices, consider a co-working space or have your team work from home. Do you need permanent staff, or could you manage with freelancers as you grow? Do you really need the latest laptop, or could your current one last another year?
Running a lean operation creates flexibility and makes it possible to reinvest savings into growth opportunities–or put money away for future expenses.
Remember: Investors may view unwise financial choices as a reason not to invest. Before every purchase, think about how a potential investor might see the expense.
5. Identify smart expenses
In addition to minimizing fixed costs, learn how to identify smart expenses–investments that offer a strong ROI.
When NYX Cosmetics founder Toni Ko started her company, she knew that marketing costs played a significant role in making cosmetics expensive. To differentiate her brand, Ko spent more on product quality and premium packaging than marketing, making NYX Cosmetics both affordable and seemingly indulgent. The strategy worked: NYX Cosmetics eventually sold for $500 million.
In your business, identify areas where you spend a lot but get little in return. Ask yourself what your customers value- and how that compares with your current spending.
6. Know your cash flow
That $70,000 sale won’t cut it if you have $60,000 in expenses due before the revenue reaches your account. Keep a close watch on how and when money flows in–and flows out–of your business.
Payment terms, billing schedules and fixed costs affect cash flow, so learn how to anticipate times or seasons when money typically gets tight. This sounds like common sense; however, it impacts everything from hiring to customer payment terms to your product or service itself.
Analyzing cash flow on a six- to twelve-month basis will give you the vision and predictability necessary to make your business scalable. Developing a strong financial foundation will position your company for success!