Becoming Effective: Financial Literacy and Money Management
Financial literacy is a hot topic in the entrepreneurial world. Many people are afraid to discuss the reality of their finances in their private lives and that fear is multiplied tenfold when it comes to the reality of dealing with the costs and monetary management of a business. Yet, it doesn’t have to be scary.
The fear of finances is akin to the childhood fear of the monster in the closet or under the bed-- it’s mostly in your head. You cannot become financially literate or stable without first acknowledging and facing your current financial reality.
Costs
Start-up costs are the most shocking part of running a business. Whether it be supplies, technology, staff, or other resources, starting your business is going to cost you money. The best way to budget for these costs is to be realistic about them. What do you absolutely need to ensure you start your business according to your vision and mission statements? You do not want to sacrifice quality service/goods or your company’s reputation just for the sake of opening. In order to create the proper budget and secure the right financing for your business, it is important to begin with a solid plan of how much it is going to cost you to begin.
Once your business has been launched, your costs shift. You should keep close tabs on inventory, supplies, shipping, your website, marketing and promotion, utilities, rent and even the time you put in to running your business. All of these things are costs that should be tracked in order to build a proper budget.
Revenue
The greatest hindrance to having net revenue for most business owners is their pricing. The price point of your goods/services as well as the current demand for you goods/services should be set so that you are able to cover your costs and have money left over. This does not automatically mean you need to set higher prices. Sometimes higher prices mean a lower demand. If the lower demand reduces your revenue and you are unable to create a higher demand level, then your prices might be too high. If your demand is high but you are not making enough money to cover costs or are unable to meet the demand and losing out on revenue opportunities, then your prices might be too low. It is important to note that there are also several other factors to consider in these situations that we won’t go too in-depth with here for the sake of brevity. However, the key takeaway here is to keep your finger on the pulse of your revenue. It can be a clear early indicator of the financial status of your company.
Budgeting
Budgeting is a major part of business success. Unless it is a non-profit, the goal for every business is to make money. However, you must consider your costs versus the money you are able to bring in. Having a high volume gross revenue is great, but it is your net revenue that is a clearer indicator of how well you are managing your business’ finances. Think of it on a personal level. If your net pay is $3,000/month but your bills equate to $2,600 a month, you only have $400 a month to survive on. That does not leave much room for saving or enjoying life and it might be time to consider lowering your expenses or figure out a way to increase your pay. The same concept works for running a business. If the majority of the money you are bringing only covers your business costs, you need to review ways to lower your costs and/or increase your revenue. It takes most new businesses 4 years to become profitable, so do not panic if your company begins with a slight deficit. The key is to ensure your budgeting is set up in a way that encourages growth each month.
Financial Management Considerations
There is a growing trend of entrepreneurs seeking loans to begin their business or keep the business afloat for awhile. Please be cautious regarding the loans and the credit for which you apply. These measures should be taken only after you have put in the work to create a clear picture of your financial status. Seek input from an adviser that is not a lender. Then make the best decision for you and your business.
Time is also an important factor to financial literacy and management. Not only the time you have been in business or the time it will take to become profitable, but also your time as the business owner. Most entrepreneurs forget to factor in their own time costs when it comes to their business’ finances. Time is money. Your time is directly linked to your money. Account for that time, especially when it comes to productivity cost factors.
Lastly, always keep an honest eye on the services you are paying for. Filing to establish your business, creating your website, and other services should not be expensive in most circumstances, yet several people are paying others hundreds of dollars for services they could have performed themselves for a fraction of the time and costs. Did you know that forming an LLC in the state of Georgia costs $100 and takes less than 15 minutes? Yet, people are habitually paying others $300 to $700 plus the filing fee to do it for them. Research and ask for help before wasting valuable funds that do nothing towards increasing the profitability of your business. This is your dream. Make it work for you.
