Smart Money Strategies for Entrepreneurs
Let’s face it; you didn’t get into business just because you didn’t know what else to do with your time. You’re an entrepreneur because you want to make money — trips to Fiji don’t buy themselves!
Hopefully you’re well on your way to a profitable business, but as that money comes in there’s one big thing to think about: cash flow.
Even businesses in the black can have major money issues due to poor cash flow management.
No matter if you’re a new entrepreneur or have been in the biz for what feels like a lifetime, managing your capital is a crucial component for success, and these few simple tips can make a world of difference.
Eyes on the Prize
Knowing your break-even point — where your profits just manage to cover your costs — is the first step to successful cash flow management.
This is a bit of a sneaky tip, since knowing your break-even point doesn’t necessarily ensure you won’t struggle with cash flow at any point.
What it does accomplish is a straightforward target to aim for. You know that if you have the same amount of money coming in as you do going out, your business has a chance of success.
Get to the Point
So how do you find that magic break-even number?
First, you’ll want to start with your fixed expenses. This will be the easiest step, since fixed expenses remain the same no matter what the other variables affecting your business are.
Next, you’ll need to analyze variable expenses.
As the name suggests, these expenses fluctuate. They may change based on the time of year, market, material costs, or any number of other factors. Variable expenses fluctuate based on revenue as well — if you’re selling more of your product, you’re having to spend more on production.
After looking at both fixed and variable expenses, you’ll have a good idea of how much money you need to keep afloat. Depending on your business, that may be all you need to know. Aim to make that amount or more each month, and you’ll be able to stay in the black.
If you’re selling an individual product, you can use your break-even point to determine product pricing. For example, if you need to make $2,000 a month to break even and you believe you can sell 200 widgets each month, your break-even analysis tells you that widgets should be sold for $10 each: 2,000 ÷ 200 = 10.
Ideally, your business will thrive to a point where you’re making more than that magic break-even number.
After this point, the goal becomes having the amount of money set aside needed to break even for the month or quarter, so you can rest easy knowing that your expenses are covered.
Play with the ‘House Money’
If you’ve ever been to Vegas or Macau (or even a casino night fundraiser at your kid’s school), you’re familiar with the concept of house money.
Picture yourself at a roulette table, where you bet $10 on red. Lucky you, red hits and now you’ve got $20! Keep playing to your heart’s content, but set aside your original ten bucks and only play with your winnings.
You’ll come out ahead, or at least even, as long as you’re willing to walk away from the table with your original $10.
Keeping a reserve of income to cover expenditures for the foreseeable future allows you to make riskier business investments or one-time purchases with any extra income.
Once you’ve got a nice little stash of “house money” to play with, you have some options. Thanks to your handy break-even analysis, you know your expenditures for the month are covered.
A smart business move is to somehow expand your business in a profitable way. Perhaps there’s an investment you’d like to make that may take longer to develop and become more profitable than you’d usually be comfortable with.
Now’s a great time to use your extra capital, since it’s all gravy and you’re not relying on it to instantly turn a profit to keep your company afloat.
You could also consider taking that house money and using it to grow your business by investing in other entrepreneurs. New businesses often need a helping hand, and — if you make a smart decision — you’ll earn a profit while other people do the work.
Save for a Rainy Day
Perhaps it’s called cash flow because, much like the tides, money comes and goes.
Savvy businesspeople will be prepared for lean times by setting away extra money in seasons of plenty.
It’s easy to get caught up in the exhilarating months where money is rolling in and you’re feeling infallible, but it’s worth remembering that some months you may not hit your break-even point. Hopefully you have more good months than bad, but as any good Boy Scout knows, it’s important to be prepared. Squirreling away extra income will serve you well in months where business slows down.
Not only will having solid savings from profitable months be good for your bottom line in bad months, keeping some money in reserve will also save your sanity. The stress of whether or not you’ll be able to keep the lights on isn’t something you ever want to experience.
Don’t Spend it all in One Place
So, when your roulette-bet, big-business idea proves profitable, what’s the best strategy?
It can be exhilarating to realize your hard work is literally paying off, but it’s important to look towards the future and recognize that a big check today will — if properly handled — pay your bills tomorrow.
If your business is growing, there may be one-time expenditures that you have your eye on. Buying a standing desk, new monitor, and a ‘thanks-for-the-hard-work’ happy hour for your team may seem like valuable ways to spend a windfall — and I’m not saying you’re wrong.
However, your team won’t appreciate that happy hour if it means you’re short for payroll later in the month.
Budgeting when Funds Fluctuate
When your income comes in floods and trickles, having a solid financial plan will be a lifesaver.
In addition to your break-even point, you should also know your baseline income. Take a bigger picture look at the last six to 18 months of your business income to determine your minimum income. If your business is going to be profitable in the long run, your minimum income should align with your break-even point.
Create separate savings accounts to get a clear picture of how much money you have for various expenditures. If you’re always adding a small percentage to an account for bonuses or raises, you’ll have an easy snapshot of whether you’ll be able to offer those perks to your team. Online banking makes it easy to set up multiple savings accounts and automate the savings, so you could easily have separate repositories for funds to cover anything from office supplies to new investments.
Prioritize and schedule spending. Knowing what the most important business needs are will give you a good guideline as to what to purchase first — for me, a new coffeemaker would always trump repainting the office walls — but you also need to know when you’ll be able to make those purchases.
When profits are up, creating a goal to meet before you make low-priority purchases will serve your future-self well. For example, making sure you have enough saved to meet your break-even point for the next six months before you buy a new Nespresso is a solid plan.
In addition to having your break even money set aside, keeping a list of one-off items you’d like to purchase will help you better plan your spending so you don’t find yourself short on cash when bills are due.
Be Patient with Your Investments
You’ve got plenty of know-how when it comes to making smart business decisions, but one of the key factors in building a successful and profitable business is time.
Let’s say that you purchase a website for $20K that’s making $1,000 a month.
It’s a solid investment, but if you hold onto that website until you’re making $2,000 per month, you’ll make back your original $20K and more after you sell the site for $40K.
Suddenly you’ve made more than double your investment between the profits from the site and the sale, and all it took was a bit of patience. Who says there’s no such thing as easy money?
Putting it all Together
By now you’ve probably got a pretty clear picture of simple steps to manage cash flow and keep your business successful.
It all boils down to knowing your break-even point, having a solid strategy for managing your money, staying calm when you get those big paychecks, and making wise decisions.
To sum up:
- Figure out your break-even point
- How much do you need to make in order to cover your expenses?
- Make smart investments and wait for them to pay off
- Patience is a virtue and letting your investments grow will earn you more money in the long run.
- Set aside earnings above your break-even point to use for:
- New investments
- Times when business is slow
- One-time expenditures within reason
Simple, right? Now go forth and prosper!