The traditional method of accounting and money management is backwards.
According to GAAP, (Generally Accepted Accounting Principles) you start with your sales, deduct expenses, pay your taxes and then you get the profit, assuming there is any. Now that seems very sensible and like the way to go about it. Sell as much as you can, keep your expenses low and you'll reap the rewards. However, the emphasis becomes growth, selling and soon your little pocket sized profit eating business becomes a big out of control monster.
When I restarted Freedom Flowers, I decided that since I was working a day job and didn't need a salary, I could reinvest all my income from sales into growing my business. I think it's called bootstrapping. I would keep reinvesting and growing it until it was running efficiently for me to quit the job and start drawing a salary. I've ran the numbers and know what kind of sales I need to be making so I need to grow it up to that point, and thus get there faster. Sounds solid enough right?
Does this look familiar to you? This is the entrepreneurial equivalent of the paycheck to paycheck means of money mismanagement. As soon as I had a chunk of cash, I was looking for a way to invest - ahem, spend it in the name of "growth." When sales slowed down, I was having to make cuts and scrape to cover expenses.
Covering expenses happens one of two ways. You cough it up out of a personal account, or you come up with a quick cash generating idea that is probably not aligned with your vision. This is especially easy to do when you have a fuzzy vision in the first place. There's probably some sort of compromise brewing by either taking a client or project that is not right, or by doing a thrown together at the last minute promotion. You introduce new strategy to make fast money rather than new strategy to take the business in the ultimate dream direction of what you want it to be or who you want to serve. Worse than that, you might stoop to low class manipulative marketing or in some other way go against your morals. Hey, people wouldn't do it if it wasn't effective.
We need to stay out of desperation mode to avoid temptation.
What we focus on, we empower. What gets measured gets done, and that is why I've been having you track goals and customers. With any accounting, you'll track sales and expenses also. Sales are good, growth is good, but it needs to be the right sales and growth, and the right mindsets need to be fueling it.
The problem with GAAP is that tendency to spend it as fast as you get it. It enables our natural tendencies. It happens in people's personal lives and it happens in business. I can start a business on no money. I can be really creative in operations because I have to be, and because God put everything in me to succeed. But as the business grew, I spent more, believing that's how you get successful. You gotta ramp up your infrastructure to keep up with growth. "Takes money to make money."
Have you ever heard of "pay yourself first?" Ironically, it's for your personal money management from paychecks that you would put into savings or investments so that you don't use it up on groceries, bills or stupid stuff. Somehow paying yourself first has not occurred to most business people.
I want you, hell or high water to commit to having a profitable business by paying yourself first. It's a very simple decision.
I mentioned Craig Hill's book " 5 Wealth Secrets that 96% of Us Don't Know" earlier as some optional homework. In it he teaches a simple jar method for money management (that would be bank accounts if you're a grownup) where you allocate percentages to different jars, and never move money from one jar to another. You learn to operate within the confines of that amount of spending money.
In a business, it would look slightly different. From your revenue, perhaps 10% giving, 5% profit, 40-50% you, 15% taxes and 20-30% operating expenses. It's not about getting these exactly right, and it will vary by business, but it's a sane ballpark to start playing in.
If you have an established business and your current percentages are nowhere near this, you'll have to slowly steer the ship in that direction. It's not an overnight overhaul. You'll start very conservatively banking profit, and gradually increase it. You'll slowly decrease expenses and bring it into line with the size of your business. Best of all, you'll get paid.
What I mean by very slowly is 1% at a time. If you've not been banking a profit, start with 1%. If you've paid yourself 20%, increase it to 21. Next quarter, you'll raise it again until you're inline with the above suggestions. The idea is to not notice it so there is no excuse not to do it.
Quarters begin the 1st of Jan, April, July, and October. Set your calendar reminders.
Quarterly, you'll take 50% of what's in your profits account and use that for yourself, for something fun and celebratory. Whether that buys you a latte or a trip to Maui, it's fun money and your reward for being in business. You are profitable!
Let's get on to the other big financial -
Pricing.
What you don't want to be is overly influenced by is what everybody else is doing, and aiming for the "going rate." And I don't think any of us want to be known as "the cheapest source." We need to be the "premium people." Your clientele will change, and that's a good thing. You'll loose the bargain hunters, the whiners, the entitled, and be left with really serious people who know what they want and are passionate about getting it.
My suggestion would be to price it on the high side and push yourself to deliver superiority. Take it up to your discomfort level and up your game. Deliver the outrageous. If not you then who? We've worked hard here to see you move into the things you are truly supposed to be doing. Knock the pretenders off the throne!
Set your prices up as high as you dare. It's good for self-esteem. Keep in mind, it's not about how much business you can do, selling low, running yourself ragged to keep up with orders while effectively selling yourself into slavery. You can also have a great business by doing less business but getting paid more. The former sort of feels successful... until you really look at the numbers and know that you need help but can't afford to hire anybody. The latter can feel like business is slow, which can be mistaken for unsuccessful even though profitability is high.
What price will have your clients take your product or service seriously, engage fully, and get the most value? If they aren't paying very much, they aren't going to value it very much. Just sayin'.
On being affordable.
I understand this. I want everybody to be able to benefit from what I offer, especially people low on funds. You can make deals with people, but I would be careful here. Especially if they are bringing up what your cut rate competition charges. In this case, you explain why you are better and you might, if feasible, offer to match the competition on price as long as the customer accepts that you will be downgrading the level of service or features to match the competitor as well. If price is genuinely the issue, they might be ok with this.
This is a wonderful blog post someone put in the facebook group. My 3 Step Process for Customers Who Think Your Prices Are Too High.
One solution is to provide multiple products or service levels as previously suggested. Back to the "good, better, best." If some buyers are genuinely price oriented, that’s fine, but they get the lower service level. Contrary to popular opinion, most buyers are actually value oriented, and will choose higher value services, so long as they recognize the benefit, or can be shown that by using you then profitability will be increased. Many people will base their opinion of you off the price. Don't discount yourself.
Essential Homework:
Get a money management system and accounting set up. I use Godaddy bookkeeping, but I got in when it was called Outright. It was free until Godaddy got a hold of it, but I'm grandfathered in. Wave is free and looks pretty similar. Get some bank accounts with appropriate names like "taxes" and "profits" in place. I have those 2 in money market accounts because I only get into them quarterly. Set up a calendar reminder every month, to divvy up your money and keep your financials on track.
Questions for Papa/God
What do the ideal percentages need to look like for my business?
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