“Two seventy-five times… Oh, sorry, I didn’t see you there. I was just busy doing some business math…” said no business owner ever!
One of the things business owners really hate about their business is the finances part. (Unfortunately, it is also 1 of the 8 key skills to being a successful entrepreneur and taking your business to the next level.)
Business Finances gives us flashbacks to math class where we had to
- sit there,
- stare at numbers on the board,
- do worksheets
- memorize multiplication tables with tears running down their eyes,
- and get confused by graphs and calculus.
Finances remind us of that.
On top of that, there’s the emotional baggage we all have in our personal finances – the pain of not having enough money -of having bills that are coming through and the stress.
Typically, what do we do?
We just are an ostrich and we just bury our heads in the sand and hope that the storm will go past.
That doesn’t work for personal finances, and it definitely doesn’t work for business finances.
Why Is It Important To “Know Your Numbers?”
In order to be a successful entrepreneur, you must know your numbers and understand the business finances.
What most business owners do is they maybe have the general lightest idea of finances (many, not even that) and they just stick their head down they say “I just need to sell more and it will solve my problem.”
I’ll tell you after working with hundreds of business owners I’ve talked to quite a few who actually are LOSING money on some of their sales, and they don’t even know it.
Now, whenever you’re losing money and you sell more of something, you actually make your money problems worse!
So by doing some basic math on paper, you can actually project ahead, what will happen in your business.
You don’t have to actually go out there and run it day by day in order to find out your business model has flaws to be tweaked. You don’t have to wait to look at your negative bank account and be like “Oh, I guess I’m not making as much as I thought I would.”
We can do this on paper and project it forward!
Setting Assumptions
Now finances in business are hard to master and one of the main skills that people lack is the ability to set up assumptions.
So I’m using assumption as a vocab bold word here.
This is when we don’t have enough information to know an actual thing. We have to take a guess.
When we’re coming up with an assumption, a good method is to look at a range saying “Well I don’t know how much I’ll charge for my product. I know we’ll be more than $10 and less than $75.”
Now we’ve created an assumption that we’re going to be somewhere in that range.
From within that, we can pick a singular value. We can say I’ll start at $45. We know it’s between that range and it went from being “any possible number” to a smaller range.
When managing business finances and projections we have to make assumptions.
Show Your Work
I ALWAYS recommend in this stage show your work.
This is important because as time goes on those assumptions will change.
If you use the assumption that your cost of goods was going to be $17, and all of a sudden supply chain problems happened and it goes to $30, when you’ve shown your work, it’s easy to go back and basically swap out that 17 for 34 and see what happens to the rest of the math the whole way down.
If you don’t have that you have to get out all the notebooks and do the math all over again.
After doing the math on paper, I always recommend taking some time to document the math that you did.
Also, if you find out much later because your bank doesn’t match what happened that your math was wrong. You can recreate that and be like “Oh I divided by the wrong number here” and figure that out as well. So showing your work can save you a ton of time.
Business Finances Are Like Personal Finances
Knowing the finances of your business is just like household finances, meaning you have to worry about
- how much money is coming in
- and how much money is going out.
There needs to be more money coming in than going out or you have a problem.
In business, we have the advantage because typically we have very clear reports to look at.
So a common practice that I recommend my clients do is that each month they print out a copy of their profit and loss statement and compare it to the previous month’s profit and loss statement.
Look for any major discrepancies, then they can use that to predict what the next month might look like. In doing so they have some predictability headed towards the future.
They also could identify crazy spike points where things were headed in a similar trajectory and all of a sudden expenses on something went way up or the profit went way up on something or went way down.
And because of that they know where to zero in and do some more in-depth digging.
But if you’re not managing the finances, you’re really kind of walking around blind it is really really hard to hit that next level – to hit your goals and projections and to get out of the daily grind.
Financial Statements As Your Scoreboard
The final thing that is so important is the financial statements of your business. The financials actually are the scoreboard of your business.
Whenever you have those financials set up, you can look at them and know “Am I making the amount of money I need to make?”
And if you are you can sit back and relax a little bit.
And if you’re not, you know it’s time to panic.
What do you think I find most often when owners aren’t tracking this stuff very well?
What they’re doing is they’re panicking when they’re actually totally fine.
They are actually ahead in the game by 37 points, but they’re acting like they’re down by 30 with 10 seconds left – they’re freaking out but they didn’t need to be.
So the finances can also give you a baseline reality-based measurement that isn’t just your emotions and how you feel that given day.
So finances are a key part of the entrepreneurial skills to grow your business.
Let me know any questions you have.
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