It's Time To Put Your Cash To Work

There’s something that is instantly gratifying about being paid in cash - something kind of primal about it. There’s immediate feedback that the work you’ve just done for someone has been validated and that you now have 100% of the revenue you were promised in exchange for that value. Oh, and there’s also the fact that you now have just a little more of that sweet sweet medium of exchange to use to help you get the things you need for yourself and your business.

Cash really is king (or queen).

Even as a consultant I get excited when someone extends the offer to satisfy an invoice in cash for the work that I’ve done. It’s quick, clean, and final. I know that I’ve finished the job I was hired to do and I can move on to the next one. No worries about making phone calls, waiting on the mail, or dealing with people’s excuses for non payment.

Now, if you’re reading this odds are you know exactly what I’m talking about - regardless of the type of work that you do. It’s not always sunshine and rainbows though when it comes to dealing in cash. I’ve had quite a bit of experience coaching people in cash heavy businesses and can’t wait to share some of the lessons I’ve taught to them about how to not only make the most of it but protect you as you grow your business.

My first question has to do with what you are doing with the cash you have already?

Is it taped to the back of the toilet, in a sock drawer, or stashed in shoebox somewhere? Better yet is it non-existent because, like me sometimes, you succumb to your impulse shopping urges. (Hey even business coaches get weak from time to time!) If any of those describe you then someone should slap you on the hand, in a firm voice say “NO!”.

First thing you need to do is remove the temptation to spend and reinforce the cash that’s coming in and flowing out of your business. Now I know most of you who have hidden stashes will argue that it’s in a really good secret hiding spot. Even still, in the event of a flood, fire, natural disaster, curious house pet, or really good house party you might be exposing yourself to unnecessary risk.

Find your favorite banking institution, one you are comfortable with, and deposit! If you already have an account somewhere let’s start to use it. When you physically separate yourself or add an extra step in accessing your funds it’s been proven to help your cash management efforts. I’ll explain a little more deeper into this piece but you should have an emergency account, an account for bills, payroll, and general operation spending. I know this sounds like a lot but seeing everything working independently is a real key to keeping your business running lean and mean regardless of industry.

Next is a budget.

There are a ton of downloadable spreadsheets and websites you can use to help you with your budget if you don’t have one already. Don’t tell me that you do mental math and you always have an idea of what’s coming in and and what’s going out. I’m calling you out! When you leave things up to be mentally tallied you also are subjecting your finances to your internal rationalizations. What I mean by that is you are convincing yourself that it’s OK to spend a little extra here or there when you really shouldn't be. I’m a big fan of Quickbooks but if you feel like your too small or don’t have the time to learn something new then a spreadsheet works just fine - there are free templates everywhere. This is not just something you do once and forget about it or it tape on the wall only to eventually go blind to it.

You can’t be afraid to get a handle on your business’s finances. So we don’t even have to call it a budget. We can call it a spending plan!

A spending plan starts just like you think a budget might. You’re going to map out all the places your cash goes throughout the month. I want you to start by thinking about all your fixed expenses first: rent, equipment payments, internet, insurance, health care etc. Then work on variable stuff: office supplies, lunch meeting, fuel, electric bills, etc. At the very end I want you to create a space where you are saving between 5% and 15% of every pay event - we’re trying to bank at least part of your profit here.

So after all the traditional budgeting is done - I want you to look at what you have in front of you and make a plan for that spending. Start by breaking out a calendar and visually identifying when you might need to have cash for during the month. This can be for recurring stuff as well as payments you need to make for upcoming events, like conferences, you want to attend. writing the dates that you know you need to have cash for. It’s good to know what you have to SAVE for but it’s even better to anticipate what you are going to SPEND on. You don’t have to be afraid to spend money in your business. It’s all part of the game, especially for things like Facebook Ads, or other marketing, where it’s not clear what the real ROI might be. For those savings though you should set up a separate bank accounts I’m a big fan of divide and conquer - when you create different bank accounts for different goals or purposes it helps actually reach them because you can see real progress.

Here’s a real example. If in your entire business career you deal solely in cash do you think financial institutions will know you exists. Do you think they would be willing to extend credit to you? Probably not. Not only do you not show any kind of assets to back up the risk they would be taking on you, you haven’t showed them that you can be a credible or positive risk. When your paying bills you should be linking them to a bank account so that you can start to build activity and a reputation for being a good credit risk. As you grow you will potentially need that credit and financial history for borrowing/investment in more employees, more inventory, a new building, or just more stuff to help you deliver more value. If you don’t have the history it will be almost impossible to get anyone to lend or at least lend at any kind of competitive rate.

Without going into too much detail on this one, taxes are another issue (I have to save some of the good stuff for subsequent posts). Once you have your foundation tools in place you need to start working to protect yourself from an audit or unnecessary heat from the IRS. The easiest way to do that is pay your quarterlies. Paying something into the tax system on a quarterly basis not only lessons the blow come April (and December) but in the event of an overpayment or loss in the business, reduction of basis, you get a refund. What it also does is keep your business activities honest in the eyes of the government. When you are proactive and report properly you are less likely to draw the attention of an audit. Which again is good on so many levels.

I’ve given a bit of advice here but I’m going to offer some real tips in bullets below to give you a direction to start looking for resources that can help you - and that are free.

• Quickbooks or any means of actually keeping track of your money - seriously take a look and budget. One caveat though is that you have to be HONEST! If you’re not honest when you start then any feedback this system gives you will be bogus. So I don’t care if you think you are in terrible financial shape, don’t mask it.

• Start at least a checking account. Now there’s no need right away to go open 47 bank accounts. If you don’t have one for work yet go get one. Then from that account you can distribute your pay however you see fit. The benefit is that you have a running tally of what you’ve made for your own accounting’s sake.

• Set some real goals. What do you want to do in 3 months, 6 months, and a year out? What about 3 years out? Write them out and revisit them regularly. Having goals creates an anchor to taking your money situation seriously. If it’s a new car or a new place you’ll never get there if you aren’t thinking about it.

• Deal with your payments, invoices, and revenue right away!! The longer you leave that cash laying around the harder it will be to put away. The goal here is to avoid having to think about where the next rent check or even meal is coming from.

• Automate as much as you can. Set up monthly withdrawals from account to be deposited into your specific business accounts. Even your bills should be set on autopilot when necessary. The more you automate the less you’ll think about it and the better you will save.

I know there was nothing revolutionary here but I hope that I at least got you to thinking about your own situations. In upcoming posts I plan to talk more about the different budgets you can try to employ and actually give a little more instruction on how to get it done. For now, let’s tackle mindset, get you putting cash somewhere safe, and start thinking about how you’re going to keep track of it.

Take Control Of Your (Business's) Money

Has it been a month already?! Well, I'm back and you're going to see some new and interesting (I hope interesting) formats coming your way. 

Late summer is an interesting time of year. Lots of business owners will tell you that August and December are their worst months because their customers disappear. While I have a whole bunch of problems with that kind of thinking the one counter I want to offer in today’s post is that this time of year (and in December) is a great time for a  little reflection in your business.

It’s important to pick your head up from working on deliverables to make sure you're making decisions that keep your business moving forward - in the way that you want. That means taking a look at how your managing your money everyday. Whether you’re just starting out or running a 7-figure business, understanding your budget will help you make better decisions when it comes to making bigger time, monetary or relationship based investments. And yes, even if you feel like you don’t have any money you still need to think in terms of a budget.

In today’s post I am going to walk you through the concepts, tips, and tactics that go into organizing your cost structure so you can price as strategically as possible. This post is going to explore the major cost questions and concepts that you should be considering when you are bringing your good or service to market. The goal is to avoid what I’ve seen so many other entrepreneurs do and just use mental math to think about the costs of doing business – and ultimately get themselves into a lot of trouble.

To start you need to understand that there are two kinds of costs, well there are more than two but, let’s start with the two big overlying arches of costs. There are explicit costs and implicit costs. Explicit costs are costs relating to money that is used to purchase your resources. That can be inventory, wages, works in progress, and even the packaging your products or service go into. They are probably the costs that you are the most familiar with because the money comes right out of your pocket.

The other category of cost that is a little sneakier to nail down is the implicit cost. An implicit costs is the cost associated with the opportunity either lost or gained in choosing how to use your resources. It’s also known as opportunity cost. Think of it as the cost of what you give up to gain something. It’s these two broad concepts that are at the hinge of every business decision you will make. You have to decide not only is the money your spending worth the resource you're spending it on but, what else could you spend that money on – could that money be best utilized in some other part of your business?

In answering the “what if” cost questions you have to break out your costs a little more to get a better understanding of how money is flowing out of your business. You do this by breaking your costs down into two major categories. I know another pair of terms but these are costs that you can put directly into the cost analysis worksheet that goes along with this post.

The first are variable costs.

Variable costs are costs that vary with your level of output or production. These are costs that are either growing or shrinking based on how busy you are. If you’re a restaurant owner it might be the produce you purchase that week and if you are a small service provider like an attorney it might be the amount of letter head you print. As you need more stuff to bring your product or service to market you need to spend a little more money. It’s crucial to keep track of these costs over time as they will not only help you keep your pricing competitive and profitable but they provide some insight on how your business is doing in the long term. You might be able to discover your busier times of the year or get some insight on how successful your advertising is for example.

To best track your variable expenses think about them in small groups. You don’t have to list every single purchase you have but think about the types of purchases you make regularly that may change over time. Are they office supplies, perishable food, wages, manufacturing costs, etc? Based on your level of activity you may even be able to negotiate lower costs per unit/purchase with your suppliers. Trying to discover ways to create strategic relationships with the people or businesses you buy from is a great way to keep those variable costs as low as possible and to protect that profit margin of yours.

The second type of costs to isolate are the fixed costs.

And, just like their name sake these are costs that remain relatively the same over time. These are the costs that you might not have input in and just have to pay as part of operating your business. They might be costs associated with rents, utilities, bank loans or notes, business or property taxes, mortgages, interest payments…I think you are getting the idea. Again these are costs will not change with your level of output. These types of costs are usually set by contract and can be revisited periodically.

If don’t have many fixed costs now I would encourage you to think carefully about the contracts or agreements you get into as you ramp up your business. Incurring overhead costs aren’t 100% avoidable but you can try to insulate yourself by doing your own due diligence and even just having open conversations with your providers about the type and stage of your business. Just like your variable costs, don’t lump them up into one number. Go through each month and pick out the groups of costs you are responsible to keep track of. It’s important to drill down a bit with these because you can revisit them periodically to negotiate rates and payment terms as you develop a history with your creditors.

When you add up all your variable costs and fixed costs you get to see your total costs. I encourage you to break these costs out over a monthly time span because that’s naturally when you’ll be paying for them and it’s a little easier to visualize how money is flowing in and out of your business. That monthly cost figure you arrive is called your cost of production and you can do a few neat things with it.

First you can divide it by say the number of hours you worked or the number of products you sold that month to get an idea of the average cost per unit. Remember, this isn’t how you should be directly pricing your product or service but it is a good idea to see how your costs are spread out over your business each month.

You can also use the worksheet. This worksheet is a great tool as not only does create a visual for your biggest cost drivers but it also maps it against a Pareto Curve. If you’ve ever heard of the 80-20 principle, this is the same guy. That curve is a guideline for efficiency. Guideline not a law and it might not always be appropriate for you.

It’s a starting point.

What this curve shows is where you might be able to find efficiencies in your costs. Costs that are consistently outside of this curve should be explored and attempted to be reduced. Now in some cases you might not be able to with say a rent cost if you are already signed into a year long lease but, that’s not to say you shouldn’t be thinking about a possible move or negotiation later on.

Use this worksheet along with your financial statements to develop as deep an understanding as possible in your costs. Keeping them as efficient as possible will help you keep you profitable in good economic times and even not so good economic times.

Find More Money Inside Your Business

Do you really need that wireless credit card payment processing subscription? 

Lately, every business owner I’ve been running into has been talking about needing more money. That’s usually a bait to have me ask them about their business and most of the time I bite. When I ask them about what’s going on in their business they are quick to tell me all about how they’d love to do more marketing, hiring or <insert generic growth term> (sometimes that even means hiring me) but their budgets are anemic.

Every business owner (or person alive really) has to face opportunity costs. Making choices is all about giving something up to gain something. “Not having enough money,” is an excuse to avoid making hard choices and just complaining about it shows me that there’s probably more to the story. So, I ask about more qualitative stuff. How happy are their customers? Their employees? Do they work on weekends? Then when they are feeling good about talking about themselves, and a little less defensive about money, I ask more quantitative questions and one of two things always happens.

Either they are growing and revenues/clients/customers are increasing or they aren’t. I give a little more leeway to the businesses that are struggling because they’re immediate opportunity costs probably sting a little more and the choices are a little harder. For both kinds of businesses I offer the same kind of starting advice - looking for more revenue or outside financing is not going to make all your internal financial problems go away. You need to take a hard look on what’s going on inside your business first, that’s where you’re going to find some liquidity the fastest.

Here are 3 places you can start to look for money right now.  

1. What kind of subscription are you paying for every month?

This sounds like a no brainer but some business owners hoard monthly subscriptions like people hoard apps on their phone or porcelain cats. When business is good it’s easy to rationalize away a $10/month subscription here or a $29/month membership there because you set them up once and make the buying decision once based on your financial situation at the moment of the purchase. Those small monthly cash-outflows add up though! You need to look at each of those monthly expenses as an investment. What kind or return are you getting every month? Would you invest in something that earned you negative, zero, or less than one percent on the life of the investment? NO! So if you haven’t used that gym membership in 3 months it’s either time to find some way to hold yourself accountable or get rid of it.

The same goes for monthly subscriptions to anything else. If you signed up for some customer relationship management, podcast hosting, email management or cloud storage service that you don’t use or isn’t actually helping you move your business forward it’s time to get rid of it. If you are looking for more money in your business start by getting clear and objective about where money is going automatically every month.

2. What are you doing with your time?

Time is money right? This isn’t a plea for you to go out and hustle more it’s a plea for you to spend your time evaluating looking at the billables or billable projects you have on the table. If you aren’t a point-of-sale kind of business you should be looking at tightening the payment terms or the time it takes people to pay you. If you are keeping busy with lots of billable work you can start to up the money that’s coming into the business by asking the people you serve to pay you quicker.

You can even offer some kind of small percentage off for paying early. If you are more of a retail or point-of-sale kind of business maybe give your suppliers a call and ask about either extending terms or asking for some preferential early pay terms. A few percent off a bill might not sound like a lot but in the long term it adds up. It adds up in the short term too if you’re at a point where you are trying to stretch the dollar of every dollar in the business. The same goes for calling credit accounts you have and asking for lower rates. Every. Dollar. Saved. Counts.

3. Watch your driving.

If you’re a small business owner you might be doing a ton of driving. Not thinking that every time you hit the pump it’s money that’s coming out of your business. As a management consultant I know this pain all too well. Yes gas prices are falling and yes eventually you can claim mileage on a tax return but that doesn’t stop the sting of hurting for cash now. Setting some kind or parameters around your driving can make a big difference every month. Think about how you can use more technology if you need to meet people face to face, things like Skype and Google Hangouts are my new favorites.

Planning ahead and batching your schedule with meetings or networking based stuff by location is helpful too in controlling the fuel cost bleed. Professional truck drivers and delivery companies do it, you should too. Lastly, if you can have your people come to you. Personally I used to insist on being on site with clients and for a select few I still do but if you have a professional space or a favorite coffee shop that’s close try to load your schedule such that there are big chunks of time where you get to be in one place.

You can start to work on these three right now! 

These three tips sound really simple in theory but you’d be surprised how much static you give yourself when you start to trim away the unnecessary. As a business owner you have to make choices and if you’re goal is to stay in business you can’t let any decision about money slip unseen into the murky fog of rationalization.

When it comes to the money in your business (and your life really) it’s about building good habits. No one wakes up a perfectly rational decision making maching but you have to actively try to be clear about what you expect in terms of return on those dollars you're spending. Otherwise, you’ll just be the person no one likes to talk to because no matter how good times are you’re always going to be talking about how there’s never enough money. That person get’s hard to listen to, or take seriously, after a while.