As a business owner, you’re the person primarily responsible for your company’s finances. Not your bookkeeper. Not your accountant. You.
In our 40+ years coaching business owners, we’ve found this is one of the hardest truths for our clients to accept. But the sooner you embrace the financial management of your company, the sooner you’ll be able to make smarter, more confident decisions and grow your business into what you’ve always dreamed it could be.
But taking on this role can be a major transition that requires you to examine not only your company, but yourself. So our EMyth Team has put together our top three strategies for becoming the financial leader your business needs you to be.
We all relate differently to money. And whether or not you’re aware of it, this relationship—and the financial personality you assume because of it—influences how you deal with finance in your business. Maybe you don’t even know how you relate to money. Identifying this is a good place to start.
In general, how we consider and manage (or don’t manage) money is conditioned by values we learned from the authority figures in our childhood:
“I don’t believe in debt.”
“Money doesn’t grow on trees.”
“Money isn’t important as long as I’m doing what I love.”
What did you hear about money growing up? How was finance discussed and experienced in your household? These values—whether they were intuitive or developed over time—are what consciously or unconsciously guide your financial decisions.
Learn your true values about money. And if those are negatively affecting your business, work to recognize and correct those moments when your values are getting in the way of progress.
In general, we see our clients take on three basic financial styles:
Which one sounds most like you? Whether you firmly have one attitude about money or a combination, one style is dominant. And whichever that is, it defines your relationship to money in general—and will spill into your business. Ask yourself:
Honestly answering these questions allows you to move to the next step: seeing the reality of your financial condition.
When it comes to money, we’re rarely sitting in the present. More often, we’re looking to the past (our personal history with money) or the future (what we think or fear will happen). Both are imagination, and if you’re seeing your business finance through this detached lens, you’re letting your beliefs guide your perspective—not reality. And just like making purchases or new hires you can’t actually afford, managing your company’s finances without basing your decisions in reality can lead to very real consequences.
In his recent blog post, EMyth Coach Ed Sinko explained that you can and must be a master of your own finances. You don’t need to be an expert, but you do need to understand them for the security it brings your company and the control you’ll gain over business decisions. If you don’t, the results can be crippling.
Coach Adam Traub once worked with a dental practice run by two partners who knew very little about their finances.
“They wanted to be dentists, not deal with money. So they gave the responsibility of managing the finances to an administrative assistant—who also knew nothing about finance. In her years as the ‘bookkeeper,’ this assistant never even used a simple tracking program like Excel.”
By the time the partners got to EMyth, they were convinced they were losing money and needed to close their practice. Once they looked deeper, however, they saw that wasn't true at all. In fact, they were turning a profit, but the money was so mismanaged that it didn’t feel that way. Their distance from finance created false beliefs and almost cost them their practice.
Having a loss on your Profit & Loss (P&L) happens, but you won’t necessarily go out of business because of a few months of losses. Running out of cash is much harder to recover from. The distinction here is between cash flow and profit, and it’s critical to understand. Just because you had a profitable month doesn’t mean you had a positive cash flow month. Similarly, just because you have cash in the bank doesn’t mean your business is performing well. Cash flow and a P&L have to be looked at together.
“Before we’d started working together, my client’s financial system was basically just checking her bank account—which is a very poor system. This worked okay for her for a while. Then one day, a check bounced. As she quickly tried to fix the problem, she discovered that her company wasn’t making any money—it was losing money at alarming rates and was just starting to show up in her cash balances.”
— Eben Ostergaard, EMyth Coach
Eben’s client is lucky she didn’t lose her company. By the time you realize this kind of problem, it’s usually too late to do anything about it. So how can you prevent running out of cash? By having a) enough cash reserved to cover 3-4 months worth of expenses, b) a cash plan and forecast you use to make decisions, and c) a clear understanding of the difference between profit and cash.
As a small business owner, you may be on a cash accounting system, where you only recognize revenue that’s in the bank. Essentially, your profit or loss and cash flow are the same thing. And while this is simple and may work well now, if you want to grow your business, you’ll need to eventually shift to an accrual accounting model, which creates a much more accurate picture of what’s happening in your business by allowing you to track business activity—showing revenue and expenses in closer relation to each other.
As we saw with Eben’s client, cash is your single most important asset: It’s the generative capacity of your business. You need a cash system that allows you to forecast, as accurately as possible, your cash in and cash out. This may start as a monthly forecast, but depending on your needs, it could turn into a weekly or even daily system. The point is, you need some kind of cash forecasting system.
Starting with historical numbers, you can build out your first cash forecast using either a cash management tool or simply Excel. The first time you create your forecast, everything is based on historical numbers and future assumptions. Each month that passes is going to tell you something about the accuracy of those assumptions and give you the opportunity to assess and revise. Ask yourself:
The cash flow forecast, coupled with your P&L, gives you future vision and a more accurate picture of the financial position of your business. Most importantly, it gives you the knowledge to make better strategic decisions.
“Clients don’t always stand for the value that they actually deliver,” says Eben Ostergaard. “When they do their billing and invoicing, some clients feel like they have to apologize to their customers. I tell them that a customer relationship is based on a value-for-value transaction.”
Confidently asking for payment can be difficult, especially for owners who prefer to skirt the topic of money altogether. But in the end, having a clear, simple billing agreement, and standing for it, is an expression of how proud you are of your service or product. The foundation of the customer relationship must be based on the premise that you’re providing a service, and your customer is paying for that service. Once that’s established, you’ll not only improve your relationship with money management, but with your customers as well.
If you want more help understanding how to become the financial leader in your company, schedule a Free Coaching Session and speak with one of our EMyth Coaching Advisors.