One of the defining moments that shaped my career was taking my first accounting class in university. I hated it. I knew it was something I was going to avoid at all costs, for as long as I could. I immediately switched out of my business major, and studied for a communications degree instead.
For a long time in my small business, I just avoided looking at the numbers. I simply put receipts and expenses in a box, printed out all my invoices and handed them over to my accountant once a year. No worries!
The problem with that system is that I never really knew where things stood. Sure, I knew how much monthly revenue was coming in and the big expenses like paying contractors who worked for me.
But I never really knew the big picture of where the business was going and more importantly, how it could affect my lifestyle. Knowing where my business stood financially would have made it easier to decide when to launch a new product or service, when to take a new client on and when I could ease up and say no to opportunities that came my way. I had no financial roadmap to follow and more importantly, I wanted my business goals to truly support my lifestyle.
Many years later, I still hand a paper trail every year to my accountant. I’m just not wired to input every expense into online tools like Freshbooks, no matter how simple they make it. Instead, I have a customized Excel spreadsheet that works for what I would like to know. If you hate numbers like me, consider this type of financial planning to support your personal values and what you truly want in life.
You Still Have to Face the Truth
Really look at all your expenses. Not just your business expenses, but also all the expenses in your life that drawing a salary or dividends from your business will have to support. That may include a mortgage, house or car maintenance, insurance, car or debt payments, medical, personal or your children’s education, entertainment, activities, travel, haircuts, housekeeping, tithing – there will easily be 20 or more categories.
I know small business owners generating hundreds of thousands of dollars a year that don’t do this because they feel success doesn’t equate to having to “live on a budget.” This is your current situation and while it may be a shock to see the reality of how much you spend, this is a good thing – knowing where you are starting and where you want to go will be more empowering in the long run.
Gain Clarity on your Minimum, Desired and Awe-Inspiring Financial Goals
We’re conditioned as entrepreneurs to dream big, taking things to the next level and wanting a villa in Mexico or a private jet as a trophy for “making it” in our business. The reality, for more and more of us, is that we want our business to support our personal values.
Do you know what you really want?
How much time are you willing to work in your business to get what you want?
What tradeoffs are you willing to make to get what you want?
To get a glimpse of your answers, take each of your expense categories identified in point #1 and break it down further to three segments in your spreadsheet – let’s call it your minimum, desired and awe-inspiring goals. I first heard about that concept from business coach Alexis Neely and it really works!
Here’s an example for housing:
Your minimum requirement is the smallest amount you need to be happy with. A few years ago, my family and I lived in Asia as my husband started a business there. We rented a two-bedroom apartment in the middle of the city and lived there for three years with our two young children. It was surprising how happy we were in such a small space and we learned to do without many things that took up a lot of space.
Your desired requirement is the preferred level that you want and it will be different for everyone. Maybe it’s owning a four bedroom home with a water view, renting a two bedroom apartment in the middle of Manhattan, owning a home with a large backyard in the suburbs, or a farm with a stable for horses and a vegetable garden. Perhaps you are already living in your desired situation. What’s important is that you really want it, and you do not judge yourself for it.
Your awe-inspiring requirement is a no-holds barred, dream-as-big-as-you-want goal. For me this means owning a four bedroom home with a water view and a small community. As well, I would like to have a two bedroom apartment in the heart of the city and a two bedroom beach home in Asia to escape the long and dreary winters.
Knowing these three categories, you can then estimate what the costs will be according to down payments, mortgage rates, etc. It’s a little research upfront but this is what anchors your goals into reality.
Here’s what the Housing category could look like when you calculate it:
|rent two bedroom||own 4 bedroom home||4 bedroom home plus 2 bedroom apartment plus 2 bedroom beach home|
|$2000 per month rent||$5000 per month mortgage||($5000) + ($2000) + ($2000) = $9000 rent and mortgages|
Plug in Your Current and Projected Revenues
It’s fairly simple for me to assess current and even projected revenues based on monthly retainers and it’s nice to know that’s guaranteed income I can count on. However, I also create and sell products like e-books, take occasional consulting projects or paid speaking and workshop opportunities so I have separate categories for those.
Really break down what your current sources of revenues are, and brainstorm what other potential sources of revenue can come in either through new clients, affiliate or other partnerships, new products or new opportunities that you yourself can generate.
Get to Know Your Income Statement
Your income statement simply takes all your revenue minus expenses and gives you what your profit will be before taxes. This is where you see the big picture for your business on a monthly or yearly basis and whether it’s supporting your minimum, desired or awe-inspiring lifestyle requirement.
Seeing the big picture allows you to do several things:
- Know how much you will already make with guaranteed contracts
- See when “slower” months are coming so you can ramp up business development and not get caught off guard
- Create something new that you can sell in order to boost revenue to get something you really want
- Think of revenue sources or partnerships you can put in place that will generate new income streams
- Assess the time you spend working and whether you can take on more clients, need to hire employees or contractors, or simply say no to new business
- Take time off or have peace of mind knowing that you are already meeting your financial goals
- Rinse and Repeat
It can be fairly painful to do this exercise if you don’t like numbers or spreadsheets like me, especially since you’ll be revisiting this often. This is not a one-off exercise and is definitely an example of “no pain, no gain.”
Once your personal spreadsheet is set up though, you’ll find that it becomes your compass to success on many levels. I’m often surprised when our company revenue goals are surpassed, but I also know that planning and visioning are what gets us there.
I am blogging on behalf of Visa Business and received compensation for my time from Visa for sharing my views in this post, but the views expressed here are solely mine, not Visa’s. Visit http://facebook.com/visasmallbiz to take a look at the reinvented Facebook Page: Well Sourced by Visa Business. The Page serves as a space where small business owners can access educational resources, read success stories from other business owners, engage with peers, and find tips to help businesses run more efficiently. Every month, the Page will introduce a new theme that will focus on a topic important to a small business owner’s success. For additional tips and advice, and information about Visa’s small business solutions, follow @VisaSmallBiz and visit http://visa.com/business.
Elena is founder of a technology PR agency that works with startups to billion-dollar companies. She is passionate about helping marketers and small business owners with practical publicity strategies, which she's also using for her own bling flip flop company.
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