Last week we took a short romp through Dave Ramsey’s Total Money Makeover for your personal finances. (If you haven’t gotten it yet, shame on you! I told you it would save you your financial life…now get busy!) This week, we will take a peek at using some of those same ideas in your small business. It doesn’t matter if you are a one woman show, an LLC, have three employees, or 95, these principles will apply to your situation. You cannot afford to ignore what has happened in our economy.
A brief reflection on the past four years of economic wasteland is in order. We got into this mess for several reasons. But underlying all the rhetoric about Wall Street, mortgages, big business and unemployment, is one truth: we spend money we don’t have, so we have to borrow more money, and then we can’t pay it back.
The real estate business declined, is declining, and will continue to decline, because for many years people with no real income, or no ability to pay a mortgage, got loans. Liar loans, tweaking numbers, ignoring all good sense in lending, and whatever else went on, the industry forgot that loaning money requires an ability to pay back the loan. Those loans were then bundled into securities packages and sold as investment instruments to people who should have known better than to buy poor securities. Ah, well, hindsight.
Businesses can’t spend money they don’t have, either. It is particularly painful for small businesses now because lenders clutch their assets tightly to their chests. Loans are hard to get, making expansion difficult. Business owners feel the squeeze. There are some things you can do to increase your financial stability.
First, you need to work on a realistic budget for your business. You must take the time to devise a budget that is based on actual numbers and projections. John Maxwell says, “A budget is people telling their money where to go instead of wondering where it went.” Your budget has to include all expenses, not just the major ones such as rent, utilities and insurance. You have to have cash flow, emergency funds, equipment repair and replacement, labor costs, and so on. Write down every thing you spend money on during the year…including the coffee, cream and toilet paper! Denying what you spend will not save your bacon. It will burn it.
After your budget is finished, establish your savings account if you don’t have one. Make sure you pay yourself in the savings account first. If you do not follow this simple rule of money management, you will continue to sink. You need a personal and business savings account. Emergencies arise, things go wrong, life happens, as they say. You need money to take care of the problems. Don’t be foolish about this. This is the foundation of your new financial life. If you need to hire a professional to help you get your business financial house in order, do so. You don’t want to lose your business or continue to suffer needlessly.
If you aren’t setting goals and making plans for your business and how your business financial needs are handled, you’re setting yourself up for failure. The only way to get out of this task is to die.
In our personal financial lives we need to live on cash, and as much as possible, so do our businesses. Business owners can get themselves in real financial trouble borrowing far more than they can reasonably repay if there is a downturn in the economy. Ramsey makes the point in his book that when you pay with cash, you spend less money. The same holds true in your business. Paying cash saves you hundreds, thousands, or millions of dollars, depending upon your business and its size, and that is real money you can keep in your account, where you need it.
Believe it or not, making a budget and paying cash are part of your cost containment strategies. You need to know how much money is going out, where it’s going, when it’s going, and how it’s going. You need to track every cent you spend and make sure you aren’t paying more than you need to because you don’t pay cash. Using credit unwisely leads to losing everything. When your budget is finished, your savings set up, your expenses paid for in cash, you can understand clearly just how much money you need to bring into the business to pay bills and have a profit.
If you have lines of credit, or credit card balances, for your business, work on paying off all balances as quickly as possible. Start small, paying off the smallest amount first. As you eliminate each debt, your sense of freedom and accomplishment will grow. And the best part is that your business will gain stability and solvency. That’s a great business practice!
Have a terrific day.
Patricia
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