One of the things that I’m adamant about for entrepreneurs, old and new, is building a solid financial foundation for their business. It’s just like building a quality house. It starts with the foundation to ensure everything around and on top of it is secure.
Without this, even the prettiest of houses will start to show its cracks at some point. We can dress it up with the best decor, bring in an HGTV designer, yet without something solid to hold the structure, it will not stand the test of time. You’ll notice cracks around the doorways, sagging floors, and sticky doors because there’s nothing solid to hold up what has been built.Your business is no different.
All the slick websites, inspiring marketing materials, innovative technology will not hold up a weak financial foundation. Matter of fact, it will collapse quicker when more emphasis is placed on other areas of your business rather than an eagle eye on cash flow or profitability.
Your financial foundation is a potent mix of solid planning, measuring what matters, and healthy financial habits which will provide you with insights to make informed decisions about next steps. Without this focus and clarity, a business can easily become an abyss of unchecked expenses, financial chaos, and disorganization to rival any reality TV show.
Now here’s the great news, building a solid financial foundation is easier than most think. Here are two ways to get started.
Maintain Financial Records
The precursor to a strong financial foundation is solid record-keeping which means you are or you’ve hired a bookkeeper. Remember as an entrepreneur, time is like currency. If you invest your time in one place you’re missing the opportunity to invest elsewhere. Ask yourself, what’s the best use of my time? Spending 3 hours on bookkeeping or meeting with a potential client? Sure, I get it. I’ve been there too. When you’re just starting out you may have to be a jack of all trades but this shouldn’t be your permanent business model. The longer you delay getting expert help the longer you delay your business growth. Let a professional who is in their zone of genius crunch the numbers for you while you focus on the revenue-generating activities for your business. Unless of course, you have a love affair with numbers and that’s a totally different topic.
Having accurate and up-to-date financial records gives you a clear picture of your financial reality. A scorecard, so to speak, on your marketing efforts, sales activities, expense management, etc. You can make empowering decisions with that type of information as you reflect on your results and contemplate the elements that drive performance such as new leads for revenue or product volume for direct expenses.
"If your goal is anything but profitability - if it's to be big, or to grow fast, or to become a technology leader - you'll hit problems." Michael Porter, Economist, Researcher, Author
Focus on Key Metrics
Key metrics help you to gauge the financial health of your business and use that intel to drive improved results. Here’s a few to consider.
Revenue Trends: Which direction is your revenue going from month-to-month, quarter-to-quarter, year-to-year? And why? The ‘why” becomes your gateway to figure out what’s causing the results (positive and negative). Was there less marketing that quarter? Is your business seasonal? Is your source for new leads still viable? When you uncover the answers and remain curious through inquiry, you’re able to discern the actions you need to take for improved results.
Service Profitability: What services/products are profitable? What’s making money? What’s not making money? And why? Is the offering too expensive to produce or distribute? Is too much competition inhibiting price increases? Are there other suppliers that can deliver the same value at a lower cost? This inquiry is the basis to make adjustments to move the dial in favor of profitability.
Operating Expense Ratio: What percentage of your revenue goes to operating expenses? According to a study by NYU, the average across varied industries is 31%. But it’s worth noting like most financial benchmarks, it varies widely based on industry, business model, etc. Check to see your industry average, then set the bar to do even better while maintaining the integrity of your brand. Review your past numbers and incorporate measures to regularly evaluate the return on investment (ROI) for each expense, starting with your largest three expenses.
When you prioritize a solid financial foundation, you set the stage for greater prosperity in your business. You create something solid that will weather storms and rocky conditions.
About the Author: Michele Thompson Rosario, CEO of Bright Effects, helping entrepreneurs get clients, get traffic, and get results.