The #1 biggest mistake most entrepreneurs make in business is that they ignore the financial part of their business because they don’t want to deal it. Business finances are the white elephant in the room that nobody wants to talk about. In fact, many bookkeepers work offsite or in a backroom somewhere where they won’t be seen or disturbed.
Most entrepreneurs are not money savvy. They have a great idea and want to see it come to fruition. They may have been working in a job, living paycheck to paycheck saving little if anything at all.
What they are hoping will change when they own their own business:
· They just want to do what they love
· Leave the finances/accounting to someone else
· Have it magically taken care of
· Can take what they want from the business
· Know they have a guaranteed amount of money monthly
· Have the business support their desired lifestyle
· Be their own boss
· Have more freedom
· Have more flexibility
By being ignorant to how much they are earning and spending in their business, they may either be driving it into the ground or losing a lot of money.
Most entrepreneurs know how much money their business takes in every month however what they don’t know or consider is how much they are spending to earn that money and on what.
· Even if someone running a business is a sole proprietor (doesn’t have a corporation), the business should have a separate bank accounts and designated credit cards.
· All the business transactions (income and expenses) should be run through these accounts not mixed in with their personal financial information.
No matter how much income a business takes in if the expenses are more the business will always be losing money. If a business is continuously losing money the questions the business owner needs to consider are:
· What are the spending obligations currently every month? – How much money is the business committed to spending every month no matter what. That means that even if the business is not open for a month what expenses must be paid.
· What is the money being spent on? If the business finances are in order, the business owner should be able to tell how much is being spent on what. For example, how much is spent on rent, telephone, utilities, etc.
· Is there a problem that is creating more money to be spent? Sometimes there can be a temporary issue that causes the business to spend more money that isn’t a regular expense. Maybe the building the business is in needs some major repair internally or there is a redecoration or expansion going on. That would cause expenses to go up for a period for a specific purpose.
· Are the expenses in the business necessary? Does the business need everything it’s paying for to maintain or grow? If the business owner goes over the details of what money is being spent on they may find expenses that they could cut that would help turn the business profitable.
· Which expenses are top priority in business? Money spent on things to maintain and grow the business are most important. All other expenses are secondary and aren’t needed especially if the business isn’t profitable.
A business owner always can change what’s happening financially in business if she chooses to understand what’s going on with the finances. The necessary actions needed:
· Create a monthly money plan which you will use to compare to financial statements.
· Compare what’s occurring in the business (income and expenses) to that money plan and decide what changes need to be made. Making the plan and not using it is totally useless.
· Know your numbers even if you have a bookkeeper, accountant, and/or business manager – if the business owner doesn’t care to know the financial people on your team won’t be responsible when the business goes broke.
Who is helpful to have on the business team?
A business team of people who are there for you when you need them and able to give you solid business advice. These people need to be experts the business owner feels comfortable talking to about personal details of the business especially if there are problems or challenges.
· CPA / Certified Public Accountant- files your taxes and can offer business advice from a financial perspective
· Bookkeeper- keeps track of the details of your income and expenses. Make sure to find someone experienced because this person is more hands on monthly than the CPA
· Attorney – any legal documents needed, incorporation, contracts and legal advice
· Insurance agent- business insurance and other insurance the business may need depending
· Coach/Mentor – someone to guide business owners along the way
Just because a business is earning good money doesn’t mean it’s profitable. The most important thing is understanding the financial part of business to make the necessary changes and getting the support needed so the business can be profitable.
Bonnie Gayle, CFO/Business Manager – Bonnie has managed 100s of businesses over the last 25 years. She has restructured 10 companies on the verge of bankruptcy with as much as $500,000 in debt and unpaid bills, turning them profitable & debt free. Most of Bonnie’s career has been working with underfunded startups and businesses that were in trouble until she guided them on a profitable path.