Ask someone what they think the “American Dream” is and they will typically tell you that it’s either starting your own business or owning a home.
Maybe if they knew how difficult starting a business is they’d just answer with owning a home. Being an entrepreneur is no easy task.
When you decide to start up a business you immediately become the marketing department, customer service, the administrator, the accounting department, the shipping department, the executive team, and the sales team. You do it all. You do it all, and it’s difficult to manage all of these tasks in a simple 5 day/40 hour work week.
On top of all the business tasks associated with a startup company most entrepreneur’s don’t turn a profit for years in their new business. Worse is when a new business has good revenues and the owner pays a salary to themselves eating up any profits they may have.
But isn’t that the point of owning a business, to make money to support your family?
If your point in owning your business is strictly to make money, then you’re going to probably have a terrible business… but that’s another post for another day.
Very few businesses are exempt from seasonality. There are peaks and valleys in almost every industry. Think of it like a roller coaster.
A lawn service brings in the majority of their revenue from April – October every year. A CPA makes most of their money from February – April. Even motivational speakers slow down during the early Fall.
So what happens if the owner of a lawn service pays himself a salary off the profits in his business during the Summer? He gets into January and doesn’t have any money left in the business account to get to April. He starves out and the business dies. What if he has a few employees? It makes it even more difficult to tough through the slow season because the options are to lay-off employees, close the business, or drain personal savings in order to keep the doors open.
The average new business will close their doors in less than 24 months. I don’t think in most cases that it’s because of a lack of revenue. I thinks it’s simply because the business owner can’t manage through the roller coaster of revenue’s and starves out during the slow season.
It sucks to see businesses that would otherwise be successful, close their doors. It means a dream was crushed before it took off. It means employees had to be laid off at Christmas time. That “closed” sign on the door is tangible evidence of the internal turmoil the owner just went through.
But it’s 100% avoidable. You just need to know how to set-up your business financially to succeed.
Here are some tips for managing small business finances.
1. Get Lean - As a startup business the most important thing you can do is invest your profits back into the business. There’s no need for big fancy office space or top of the line brand new equipment. As for your personal finances, get out of debt, build a healthy savings account, and slash your household expenses. Live on as little money as possible. My class Impact University will help you do this!
2. Create a Payday - I see it far too often where a business owner receives revenue, pays the company expenses with it and takes the rest home to their personal account. Create paydays for your company, even if you are the only employee. I don’t care if it’s the 1st & 15th, every 2 weeks, or once a month. Just develop a consistent pay schedule for yourself.
3. Decide on a Salary - What’s the least amount of money you need to bring home from your business in order to pay rent, feed the kids, and keep the lights on? Find a salary amount that you are confident your business can consistently pay. Now only pay that salary out on paydays. Even if your company has $20,000 of profits in August and you set a $2,000 salary for yourself, just pay the $2,000 salary.
4. Create a bonus schedule - This is where you can really ramp up your personal income while keeping the business finances in good shape. Pay yourself a quarterly bonus based on the profits the company generates for the quarter. As a sole-proprietership I currently pay myself 40% of the profits the company generates each quarter. That can and will likely change as my business grows, but right now this is an effective percentage that motivates me to focus on business profits without needing to make big sacrifices in my personal budget.
What’s great about this plan is that it makes planning your personal finances significantly easier. You’ll make the same amount in August as you will in January. By keeping your salary consistent, you’ll have enough in your business accounts to pay salaries and expenses during the slow times of the year. Having a bonus plan in place will motivate you to analyze your expenses and focus on generating revenue to produce profits.
Managing your business cash flow this way will help keep you in business when things slow down and help you get over the roller coaster ride that startups face.