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How Should I be Spending My Money?

This one goes out to my buddy, Marcus, who is crushing it flipping sofas in his spare time.

 

One thing I think we can all agree on is that starting a business is exciting!

The thought that you’re making money doing something that you enjoy for no-one but yourself is something most people only ever dream of.

But how many of us record our earning from the get-go?

I know I didn’t.

And I know that I would have benefitted from doing so sooner.

When starting out there are a few things you should be doing to ensure your business is growing.

 

It’s important to understand the value of your time, effort and product so that you can develop your brand and grow your business in the most productive and efficient manner possible.

The first thing to do is to determine the average profit made from the sale of one unit or instance of a service you provide.

If you understand your value, if you know how much your time, effort and product are worth, you can make an educated decision on whether the customer you’re serving is worth their average consumption of each of these metrics.

One book that really helped me to understand this concept is the 80/20 principle.

 

Next, figure out your customers potential lifetime value.

Will they return? If so, how often and what for?

Use this information to begin forecasting unit sales over the next 12-18 months.

This growth will not be as straightforward as drawing a line from the bottom-left corner to the top-right corner of a graph.

Attempt to make accurate predictions based on past experience and then half your expectations.

Literally.

Cut your forecasted revenue in half and double your expenses.

Starting a business rarely goes how you anticipate it will so learn to manage your expectations and use this forecast as a guide but don’t let it dictate your business practices.

 

No matter how good you are at selling your product, you’re going to have fixed expenses. Get this written down and make an estimate of how much these will cost you every month.

Consider things like rent, utilities, phone bill, fuel, employees and website maintenance but really, anything that you’re paying for on a monthly basis in regards to your business should be accounted for in this section.

Regardless of sales, these expenses must be paid so it might be worth seeing where you could potentially cut costs in these areas.

 

How much cash do you have? If you’re scraping the bottom of the barrel because you spent up on stock then you’re probably doing it wrong.

It’s important that you manage your cash flow.

Expenses don’t pay themselves and failure to keep on top of them can result in you losing far more than your initial investment.

At the very least, you should be reviewing your bank statement every month and analysing the growth of your company.

It’s not enough that you know you have more money than when you started.

Where is your money coming from and how are you reinvesting it into the growth of your business?

Want to up your game? Learn to read and write cash flow statements and start using them to improve the accuracy of your annual revenue forecast.

You’ll be able to find how much money you’ll need to cover your business every month based on how reliable your customers are and how much profit you’re turning over on a monthly basis.

 

Get used to things not going the way you imagined them.

Starting a business is tough— especially if it’s your first time— but if you keep on top of your overheads, expenses and monthly outgoings, you’re going to reduce the chances of you joining the 80% of businesses that fail within the first 18 months.  

Keep a record of your findings and adjust your business or lifestyle accordingly.

Failing to invest in your business will lead to failure and you should be planning every stage of development months in advance where possible.

Put less focus on making money and start thinking about how you’re going to reinvest it into the growth of your business.

 

   

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