What An Entrepreneur Needs To Know About Finance To Run A Business
What An Entrepreneur
Starting a business is easy, but not everyone succeeds in maintaining it, scaling it up and turning it into a mature company.
And knowledge of business finances plays an essential role in this – let’s analyze the basic concepts that will help owners manage them correctly.
Money In Current Account Revenue
Some entrepreneurs conduct business in the style of “sometimes thick, sometimes empty.” At first, there is a lot of money on the accounts, and the company feels confident: it calmly pays salaries and dividends and modernizes the business. And then the cash ends abruptly, and you have to look for them to spend at least the most necessary things.
This usually happens when entrepreneurs confuse two concepts: money and revenue.
- Let’s take, for example, a design studio and a customer who needs to make a website. Let’s define when the studio recognizes revenue:
- The studio recognizes the revenue when it fully fulfills its obligations – it will hand over the site. Yes, the company received the money earlier, but we can assume that the customer allowed them to keep their money on its accounts.
Business Without Financial Planning Is Like A Rollercoaster.
You can run a business “after the fact” – as it turns out, so it will turn out. But then you will have to face unpleasant surprises: unfulfilled expectations, cash gaps, business stagnation without clear goals.
It is better to work when the desired result is organized through financial planning.
To do this, you need to draw up a financial model, determine the scenarios for the company’s development, then budget it and control that the budget is executed.
It is better for those who have not yet planned their finances to practice using more straightforward but more effective tools: a payment calendar and a plan-fact for profit.
Payment Schedule
This is a table with planned receipts and outflows, which is primarily needed to prevent cash gaps. We make a calendar for a month or a week, check if there is enough money – and if not, then there is time to correct the situation.
Plan-Fact For Profit
It is a mini-process for organizing the result. It is best to start with planning profits for the month ahead: how much revenue will come to the company, what expenses it will incur – and at the end of the month, we compare the plan with the facts.
An Entrepreneur Should Not Take All The Net Profit For Himself.
If the plans are to build a successful company, then it should be understood that the net profit belongs to the business and paying the owner is only one of its functions.
Other essential functions of net profit are the development of the company and the formation of a reserve fund. If the entrepreneur takes all the profits, the business will stagnate and live at constant risk.
You Have To Pay According To The Rules.
Usually, in business, it happens like this: all employees have salaries paid twice a month, while the entrepreneur manages the money as he pleases.
Because of this, business people run the risk of falling into one of the extremes:
- Take too much. This is especially true for business owners who are paid advances or are given deferrals. There is a lot of money in the cash register – why not buy yourself a car.
- Afraid to take an extra penny. Entrepreneurs take the bare minimum for fear of harming the company. As a result, they live worse than they could and receive less motivation to do business.
For the owner to pay himself correctly, you need to understand your roles – and pay for each of them. There are usually two roles in a small business: the owner and the CEO.
The owner receives dividends – this is a certain percentage of net profit, which is calculated depending on how much money needs to be invested in the company’s development. When the company makes a net profit, the entrepreneur takes his percentage. If it does not receive, then this month without dividends?
The CEO receives a salary – precisely the same as all other employees. A businessman assigns himself a salary that corresponds to the market and can afford and pay monthly.
With this approach, the entrepreneur does not take money as he has to, but a transparent system.
Sales Growth Can Kill Profits.
We will reveal this point through a real example from the practice of some other Finance company.
The entrepreneur was engaged in the construction of baths: as a foreman, he managed a small team that completed 3-5 orders per month. The businessman managed to withdraw 3,928$ monthly.
Our hero did his job well, and many orders began to come in according to the sundress – more than the brigade could take. And the entrepreneur decided to do business: he hired an administrator, formed several teams, launched a website – and took more orders.
Revenue went up. But he began to withdraw not 3,928$ for himself, but nothing.
This happened because sales growth is almost always associated with additional costs: more salaries and bonuses are needed, someone needs to open different warehouses and more. And it also happens that you have to reduce prices – earlier, on small volumes, you could choose the most expensive orders, but now it won’t work like that. As a result, one is superimposed on the other – there is no profit.
Our hero temporarily rolled back, returning to “self-employment”, and honestly earned 3,928$ per month. And then, with feeling, sense and arrangement, he organized a regular business, in which he thought over this moment.
Summarizing
Money and income are two different things. Money becomes revenue when the obligations under the transaction are fully fulfilled.
It will help if you plan your finances. The basic set is a plan-fact for-profit and a payment calendar. The level is more complicated – the financial model and the budget for the year.
The owner should not think that the net profit belongs entirely to him. It should also go to the reserves and development of the company.
A businessman needs to pay himself following the roles: the salary of the general director and the dividends of the owner.
Do not chase sales growth ⟶ , and profits may decrease.
