At this time of year, fitness centres are full of people trying to shift their Christmas excess. They’ll sweat and groan, and push themselves for at least another week or so, before returning to the couch; because at the end of the day, it’s not about getting healthy, it’s about getting rid of the guilt brought on by over-indulgence.
We often over-indulge in our business too – spending money we don’t have, or don’t really need to spend – on new equipment, new people, a shiny new programme – often telling ourselves that we’re ‘investing in the business’ that it’s all about growing our revenue, when what we’re really doing is growing our expenses.
Don’t get me wrong, I definitely believing in investing in your business, but it can’t be at the expense of the financial health of your business.
So this month, instead of working on your abs and your waistline, I want you to visit the financial fitness gym and work on your business numbers. Find a personal trainer for those, and you’ll have a much more profitable year.
I visit my financial mentor once a month, and the first thing we look at is what’s been invoiced and how much of that has actually landed in my bank account. Are there people who need to be chased? Do we need to give somebody a gentle nudge? Or do we need to set up a payment plan? So that’s the first thing that we look at. What’s in the bank compared to what should be.
Next we work on ‘profit first’ principles.
You may have come across the idea of profit first, but just in case you haven’t, profit first turns those general accountancy practises – revenue minus expenses equals profit – on their head. In profit first, it’s revenue minus profit equals expenses.
What profit first asks you to do is to take your revenue and before you do anything else with it, pay yourself a set percentage profit. The ‘right’ percentage is agreed between you and your mentor, and it will be determined by what stage your business is at. So review your revenue, then take away your profit.
My financial mentor asks me to do things a little differently – I pay myself first, then I pay the profit. I know way too many business owners who don’t actually pay themselves at all let alone pay themselves first. But we’ve always worked: revenue minus a percentage for owner’s pay, (usually the basic amount for tax purposes), then a percentage for your profit, then 20 percent for tax because the Taxman always wants his cut!
Put these aside straight way – ideally in separate accounts – and what’s left is your expenses.
It’s common sense really and so simple but it’s made a big difference to the financial health of my business. I don’t spend what I haven’t got. I don’t think, ‘Oh, yeah, I must have the next shiny thing (that I don’t really need).’ If I haven’t got the money left in my expenses, I don’t buy it.
Again, I’m not saying don’t invest in your business, I’m just talking about being wise. I’m talking about saving to spend as you might do in your personal life, not just spending because, ‘I need it. I need it now.’ Quite often we don’t need it now… or ever 🙂
Think about the system that you have in your business for managing your numbers. Add a financial review to your monthly meeting, have a cash flow forecast that looks at a rolling 12 months, set up your profit first bank accounts, and stay on top of your finances.
I can’t tell you how much better I feel having a financially healthy business; knowing I have money set aside for tax and that my expenses pot is there for when it’s needed, allows me to get on with my business priorities. And of course seeing my owner’s pay pot growing, and my profit growing is always a joyous sight.
Do one thing: Find yourself a financial mentor – somebody who’ll hold you to account for your business numbers, and keep you trim, fit and healthy. Happy to share mine with you if you drop me a line.