The clear signifier that you’re running a business well is that you are making money. What this post will discuss will cover common financial pitfalls and ways of thinking that can leave the business losing money.
Don’t bet if you can’t cover the loss — so have reserves.
When we get emotionally caught up in the moment of planning to start a business, or actually starting one, the excitement and thrill about this new venture often gets ahead of strong, coolly detached reason. There’s a lot to be said about being able to block out time to cool down and consider your decisions rationally and objectively.
Every business, bar none, has gone through the experience of lacking enough money, or will experience that lack eventually. The lack of money can even be tracked back to the earliest days of the enterprise. Turning money over and putting it back in to keep the business operational is not the same as making a profit. There are so many potential pitfalls that can influence how you can create money streams that 100% get-rich plans can’t be a given.
Before you starts a business you need to make sure that one, there are people who are prepared to buy your products (you have a viable, healthy market present) and two, there are enough people willing to do so to provide you a steady, sustainable market population to support you. You need enough customers to not only break even, but to turn a profit.
It takes time to establish your customer base and build up the business to the point where you can cover costs –and while you’re doing that you also need to pay for your fixed expenses . This brings us back to the money you have available at the beginning, which is your start-up capital.
You need to have very good estimates of how long you can go on your start-up funds while building up your customer base. This ties in intimately with the kind and amount of work you need to put out on a targeted time-frame to break even, then to turn a profit.
Having enough money to keep the business running for X number of months on the funds alone –everything you make is churned back in– means you need to calculate how much you need to make, charge, sell, etc. so that the business gets to be self-supporting before the starter funds run out.
The kind of freedom and control you create by owning and running your own business can be very rewarding, and what really helps is being able to lower stress levels by using good, clear-eyed financial planning skills based on realistic assessments of how much you need and will take to reach your goals. Making sure you have (even a lot more than) enough money to start you business is an important and very beneficial buffer you can build for yourself.
Along these lines, have a good budget and plan for the worst.
Now, not having enough money when you’re starting out is one thing, and we touched lightly on what you need to consider in budgeting, and how this affects income targets, projected earnings and workloads.
- Failing to plan is planning to fail. Failing to budget is also planning to fail.
- You need to know where the money is. You need to know how much there is.
- You need to know where the money is going and how much is left, and how much is expected to go out in the next expected time-block.
Knowledge is power. Financial knowledge and awareness are non-negotiable tools in business, and the more you hone these tools, the more insight you get on how to use money, and the more decisively you act on using it to make more.
The three most common money pitfalls stem from unrealistic expectations and lackluster planning. Flying by the seat of your pants or on a wing and a prayer is not acceptable. You have to treat your business as a business, and one, underestimating your expenses, two, overestimating income, and three, thinking that money will come in quickly — will end in a serious lack of money.
This is why planning for the worst things that can realistically happen can actually help. Be painfully realistic — something like optimistic pessimism can help you assess the weak and weakest links and plan to protect, repair or replace them, and when things turn out better than you expect, you also end up saving money you were prepared to use ‘just in case.’
Expect the unexpected is also a good rule of thumb. Aside from including everything in your budgeting considerations, plan for unexpected or possible out-of-the blue events. Regular costs like the utilities and rent are easy to budget for because they’re usually the same each month. It’s the things like insurance, taxes, legal and accounting fees, equipment or vehicle repair, etc. that you need to make allowances for.
For example, putting a buffer percentage over the basic fixed costs to run your business sets money aside for unexpected costs. As an example, let’s put it at twenty percent of your fixed operating costs. If nothing happens, it’s all good, the money is still there for the next month. Putting that buffer percentage in your budget can tell you just how much you need each month to keep running and cover any sudden business-related issues requiring money. The rest is profit.
Plan for income conservatively. Money’s not a done deal ’til it’s in your hands.
Things happen: a project falls through, people do a slow fade, the other party suddenly has an emergency… Spending money wisely also asks you to be savvy on when to hang onto it. Being conservative in this case is a protective measure.
Budgeting is connected to planning for income: making assumptions about how much money will come in, or how fast it will come in, is not assured. You still have to plan for the worst. Even if you do underestimate your income, that just means you earn more than you expected, which is a good thing in any book.
Making best- and worst-case scenarios, and making plans on solid data are skills you need to learn and keep sharp. This also applies to monitoring and planning for cash flow. If clients keep getting delayed in settling their accounts, or fall into arrears, that will lead to problems down the line.
Financial savvy isn’t something you just earn without paying for it somehow with hard-learned lessons, but these tips can help you enormously on the way. Keep a weather eye out for problems, an eagle eye out on your expenses, and financial records, and a firm grip on your cash to ensure your business can keep healthy.
Like this article? Found it helpful? Bookmark Jrox Entrepreneur for more helpful articles, and visit Jrox.com to learn more about Affiliate Marketing and get access to your own Affiliate Software and eCommerce Shopping Cart.