Entrepreneurial Financial Management: Planning, Spending, Making and Showing You the Money

I recently surveyed my Carlos Cobián Live followers about potential live show topics. Not surprisingly, many of them said they wanted to know more about how to have a successful business. And so here we are, pondering the question that billions of entrepreneurs ask themselves every day.?

Today, in Part 1, we're going to focus on financial management.?

TO SHOW ME THE MONEY, YOU HAVE TO HANDLE THE MONEY

One of the most important concepts entrepreneurs need to understand and master is how to manage their business' finances. Many people dream of launching a company and making their own money rather than help someone else get rich. This dream can become true only if you know how to handle the money. Here are my top 10 keys to effectively managing your business' finances.?

1. UNDERSTAND YOUR NUMBERS

A lot of entrepreneurs set out to start a business thinking, "I'm going to sell this, charge that and take home this much." It's not that easy.?

When you start a business, you have to understand all of the numbers involved. Here are the basics, in a nutshell:?

1. Sales/Revenue: the money you get from the sale of your product or service.
2. Costs: how much it costs you to make that sale.
3. Expenses: operational costs such as raw materials, labor, rent, utilities, insurance and marketing.
4. Net Income: what's left over from your revenue after you deduct your costs and expenses.?

Businesses in different industries typically have different cost-to-expense-to-income ratios, for example:?

• Service:

Costs: 20% to 30%

Operating expenses: 50% to 60%

Net income: 10% to 20%

• Retail

Costs: 60% to 70%

Operating expenses: 20% to 30%

Net income: 2% to 10%

• Restaurant

Costs: 30% to 40%

Operating expenses: 20% to 30%

• Labor:

Costs: 30% to 40%

Net income: 5% to 10%?

2. CREATE A BUDGET

The second most important key to the successful financial management of a business is the budget. A budget focuses on how much money the business is earning and spending and establishes goals for the following year.?

Every year in the fall I look at my numbers to see how the business is doing and what it needs to succeed. I use the budget as a map to set revenue and income goals and determine what I'll have to spend to get there.?

3.?ANALYZE YOUR PROFIT MARGINS?

Always, always, always analyze your profit margins and stay on top of your costs and expenses. Only then, you can be creative with your numbers, for example adjusting prices, cutting costs or expenses, in order to improve your numbers.?

Profit margin is a financial ratio that measures how much profit your company earns for every dollar of revenue it generates. It is calculated by dividing net income by total revenue, and then multiplying the result by 100 to get a percentage.?

For example, a business with $1 million in revenue and $200K in net income has a profit margin of 20%. In simpler terms, the company makes a profit of $20 for every $100 of revenue it generates, or 20 cents for every dollar.

4. CONTROL YOUR CASH FLOW?

A common mistake many entrepreneurs make is equating selling their products or services to having money in the bank. It doesn't work that way.?

When you make a sale, you don't get paid right away. Companies usually have 30 days to make a payment. Although you're generating that sale right now (and want to celebrate it with an all-inclusive cruise to Hawaii), you won't see a cent for at least another month. That money is not in the bank and not yet available as cash flow.?

To be successful, a business needs money in the bank. That's why companies always strive to pay suppliers as slow as possible and collect money from customers as quickly as possible. Since they all want the same thing, keeping a positive cash flow can be a challenge.??

5. SEPARATE YOUR PERSONAL AND BUSINESS FINANCES

This is another super important key to success. If neglected, it can quickly kill your business.?

When you have your own company, you may be tempted to blur the boundaries between your personal interests and your business interests. Don't do it. ?

Your business allows you to live your dream of being an entrepreneur and have (or work toward) the lifestyle you want, so keep your hands off the register. Assign yourself a small salary to start, and as your business grows, your salary will grow.?

6. BUILD SPECTACULAR RELATIONSHIPS WITH YOUR SUPPLIERS

Your business depends not only on customers but on the people who provide you with the products and services you need to make and sell your own products and services. ?

Business relationships built on good rapport and trust are critical. Why? Because when (not if) you're in a tough situation (involving payments or deadlines, for example), your suppliers will be willing to work with you. If you treat them like dirt, if you fail to develop good relationships, when you need help–and, trust me, you will need it–they won't be there.?

So treat your suppliers right. No, treat them exceedingly right.??

7. STAY ON TOP OF ACCOUNT RECEIVABLES?

I know many professionals–lawyers, doctors, freelancers–who are diligent at selling and providing their services only to neglect to bill their customers. Their excuse? "I don't have time to do the billing." You don't have time to bill your customers? How do you expect to stay in business??

Billing, or invoicing, is the first thing you do, sometimes even before you deliver the product or service you just sold. The longer you wait to send the bill, the longer you'll have to wait to collect the money.?

In addition to billing quickly, you have to follow up to make sure you get paid as soon as possible. Shakira sings: "Women no longer cry. They invoice." But the key isn't just invoicing your customers. You have to collect the payments. ?

It's logical, right? Yet you'd be surprised how many entrepreneurs don't get it.

Proud Entrepreneur: "I have $100,000 on the street"

Carlos: "Great! Is it in the bank?"

Entrepreneur: "Well, I haven't sent the bill yet."

Carlos: "What do you mean you haven't sent the bill?"

Entrepreneur: "I just haven't had the time. Billing is a pain in the ass."

Carlos: "Losing your business is a bigger pain in the ass."?

Folks, money doesn't grow on trees, and payments don't happen without bills.

8. PLAN FOR THE LONG TERM

Effective financial management calls for a long-term plan that includes a budget and strategies focused on achieving specific goals over several years.?

This is very important because you can't establish goals, set a clear direction and allocate resources in pursuit of those goals without planning ahead of time. Having a long-term plan helps make smarter business decisions, improve your company's performance and achieve better results.?

9. SET UP AN EMERGENCY FUND

When too many customers decide to pay late one month or you face unforeseen business disruptions, an emergency fund provides the cash you need to continue operating. ?

Having an emergency fund saved my digital marketing agency more than once. Hurricane Maria in 2017 and the recent Covid-19 pandemic forced many companies to go bankrupt and close permanently. My business survived because I had an emergency fund that provided enough cash flow to continue operating.?

10. WORK WITH FINANCIAL PROFESSIONALS?

If you want things done right–and, believe me, you do–you need financial pros at your right hand, sometimes your left, too. Accountants, financial advisors, insurance agents, tax advisors and investment bankers, among other financial professionals, can help you develop a budget, watch your margins, create monthly and quarterly financial statements, manage your cash flow and make sound investments, among other things. Don't wait until you need one to get one.

Effective financial management is crucial for the success of your business. It's what can show you the money, ensure that you have a sustainable business model and pay for that cruise to Hawaii.?

Remember, entrepreneurs who build successful businesses help create wealth and jobs and promote a prosperous society in which all of us can move forward.