If I asked you why you started a business, you would probably give me a noble reason like impact or problem solving, but we all know that making profits is also a major reason why you run your business. If you weren’t making profits, then very soon, you’d become more of a charitable organization than a business.
The strange thing though is that many business owners shy away from talking about money. In a bid to sound noble, we focus our conversations on customer acquisition, team building, content creation, expanding our business etc., but we seem to avoid talking about the one factor that affects 80% of our business operations: money.
When it comes to money as a business owner, you need to know and understand beyond just making it. You need to understand how it works, how to manage it, plan with it, and ultimately make wise financial decisions in your business.
Over the weekend, we had an amazing time listening to James and Lew talk about finances. Lew is popularly known as the “Investment Nerd”, so you know there’s a ton of lessons to learn from him. So, let’s get into it.
Making Money Does Not Mean You Understand Money
Lew shared something during the conversation that really caught my attention. In 2016, he and his wife had a very good financial year, but that good year came with a tax bill that was large enough to make them stop and seriously rethink how they were managing their money.
That experience pushed them to start learning more about how wealthy people approach their finances and what they were doing differently, and I think there is an important lesson for business owners here.
Sometimes, we assume that if the business is making money, we must be doing well financially, but revenue is not the same as profit and profit is not the same as cash flow. Having money coming into the business however does not necessarily mean that the business is financially healthy. You can have a business that is making six figures and still have poor financial management, and this is why financial literacy matters.
As a business owner, you need to understand what is actually happening with the money your business is generating, else you stand the possibility of running into financial troubles.
Your Business Needs More Than a Bank Account
When it comes to running a business, most business owners work with the mindset of money comes in, money goes out, then the left over is profit. This approach may seem sustainable for a while but as the business grows, it is no longer sustainable.
It is very important for you to know what you’re spending, what you’re earning, what you owe, what you should be setting aside for taxes, what the business actually costs to operate and what you can realistically take home.
You also need to understand the difference between business money and personal money.
This may sound basic, but many business owners don’t have a clear financial structure around their businesses, especially in the early stages, and the longer you operate that way, the harder it becomes to understand how well the business is actually doing.
Financial Growth and Decisions in your Business
For you to grow financially, you need to get financial clarity, which will then help you make better financial decisions, and making financial decisions should depend on your numbers not what you think or feel.
As a business owner, you will make a lot of financial decisions. Some will be very small, while others could determine the direction of your business for years to come. The problem is that we sometimes make these decisions based on how we feel at the moment instead of looking at what the numbers are actually telling us.
For instance, you have a good month and suddenly feel like you can afford to increase your expenses. You start buying more stock, upgrading equipment, subscribing to more tools, hiring more people and spending more on marketing because business is booming. Then the following month isn’t as good, and you suddenly find yourself struggling to meet the expenses you created during your good month.
The reverse can also happen. You have one bad month and immediately panic, stop investing in the business and make decisions that could hurt your long-term growth because you are reacting to a temporary situation.
This is why you need processes around your finances; you need to know what your business can comfortably afford, how much you should keep aside, how much you can reinvest and what conditions need to be met before you take on a major expense. Your emotions will change from one day to another, but your financial structure should give you something stable to work with.
Know Where Your Money Is Going
As a business owner, you should be able to look at your business expenses and tell where your money is going. How much are you spending on rent, utilities, salaries, marketing, transportation and other operational expenses? Most importantly, which of these expenses are actually contributing to the growth of the business?
This does not mean that every expense has to generate money immediately; some expenses are necessary for the business to operate, while others are investments that may take time to produce results. However, you should know the difference.
If you don’t know where your money is going, it becomes difficult to know where you can cut costs, where you need to invest more and whether the business is actually operating efficiently; financial clarity gives you that visibility.
The Bigger Business Lesson From Lew
One thing I found interesting about Lew’s conversation with James is seeing how a low/bad time can actually bring about a blessing and a system of value helping several others today.
A financial experience in 2016 made him realise that earning money was not enough. He needed to understand how money worked, how people with wealth approached their finances and how better financial decisions could be made. That curiosity eventually became part of the work he does today through CaseWorth Capital, where he focuses on helping people understand market behaviour and develop better financial habits rather than simply telling them what stocks to buy.
I sincerely believe business owners can learn a lot from that. Life is full of ups and downs, as your business will definitely have but understanding that low times don’t have to be times of frustration and depression, and that beauty can actually come out of this seeming terrible time that can then go ahead to impact other lives.
So, cheer up, chin up, and keep building. Ensure you put in your best in bringing structure to your business, and also understand that no matter where you currently are in your business, it’s not the end of the road.
Believe me when I say there are tons of lessons still to be learned from this podcast and this article couldn’t capture all of them. So I encourage you to take out just 25 minutes to listen to this podcast so you can benefit from all that Lew and James had to offer through this conversation. Here’s the link to the podcast. Have a swell time!!!