Turning your passion or idea into a business is very exciting. Once you make this decision, there will be an endless number of things to do: Building out your product or service, marketing, landing your new customer, hiring, managing a team, etc.
Finance is one aspect of business that is vital to understand. You have to know your numbers. What are your sales? Fixed expenses? Projections? Your finances tell you how healthy your business is.
Before launching my social media marketing firm, Socialfly, I worked in finance as an underwriter and financial analyst. These roles gave me the finance acumen necessary to run a successful business. Here are the three financial skills I found most valuable to the success of building my business.
1. Be realistic about pricing
When you are first starting your business, figuring out how to price your product or service can be a challenge. When my partner and I first started our business, we were so excited to take on any new client that we didn’t dream of turning any down. What we learned over time, though, is that some of our clients require a significant amount of more time to service than others. We needed to get a better handle on our gross margin by client—or the revenue minus the cost of goods sold divided by the total sales revenue, expressed as a percentage.
To do this, we started requiring our employees to track their time per client. Soon, we realized that some of our larger clients were not as profitable per hour as some of our smaller retainer clients. This insight has helped us to have conversations with our clients about increasing retainers. This also allowed us to see which clients were not profitable and were just hurting our bottom line.
2. Know what you can afford
Cash flow is the amount of money that is coming in and out of your business.
In order to run your business, you need to pay your rent, vendors and employees on time. This requires having a certain amount of cash on-hand at any given time. Credit cards can help buy you more time, but you will have to pay them eventually. I never feel comfortable spending more than a business can afford. Know how fast your customers pay their bills, and consider providing incentives for paying quickly. When starting out, try to be as lean as you can by keeping expenditures to a minimum.
We are able to rely on our cash flow to run our business because of the payment terms that we negotiate with our clients. All of our clients are required to pay us within 30 days. We know when we can expect payment. This allows us to make business decisions based on the amount of cash we know we have coming in. We can also time our payments to vendors, subscriptions and payroll during the times of the month when we know we have the right amount of money in our bank account.
3. Keep your books organized
When you first start your business, you should get into the habit of tracking all of your expenses and revenue in an organized way. I recommend using QuickBooks Online for invoicing and expense tracking. There are QuickBooks specialists who can provide QuickBooks training should you need assistance in learning how to use it.
As your business grows and becomes more profitable, you will need to hire both a bookkeeper, who can keep track of all expenses and cash flow, and an accountant, who can provide strategic tax advice to you. This advice includes when to make large purchases, what can be written off and how to set up your business. It is also important to note that an LLC has different tax implications than a corporation, so there may be a time when it will make sense to change how your business is structured.
Managing the finances of your business may seem like a daunting task, but developing an understanding of the economics of your company is key to growing it profitably.