By Sherry Lutz Herrington
Building a business is a bit like building a house. If you don’t start with a solid foundation, you’ll be building your business on shaky ground.
The foundation of any successful business is solid accounting and financial responsibility.
If you do not know how much you are making or spending, then you cannot build your business with confidence.
For new businesses, it may seem unnecessary to have a formal accounting system right at the start. Nothing could be further from the truth. It’s extremely critical to start out with a solid foundation, no matter what kind of business you’re running. Building from the ground up will help you make every decision along the way with confidence.
Once the accounting is set up, use the financial reports to determine what you need to do next. For example, if you have just started and you need to invest money in more inventory, just take a look at your financial reports to determine how much money you have available. Also look at the record of your recent sales to predict how much you will be able to sell.
Use your financials as your blueprint to help you make smart decisions based on solid information.
Perhaps the next step in building your business is hiring your first employee. If you already have your accounting system set up and running smoothly, then it’s easy to add in payroll. However, if you haven’t yet established your accounting system, then it’s critical that you do so before you add payroll.
Knowing your financials in advance will help you to determine how much you can afford in payroll costs. Remember that it costs more than just wages to have an employee. Keep in mind the cost of payroll taxes, workers’ compensation insurance, extra benefits you might offer, or any support equipment you might need.
Once you’ve determined what expenses are included in hiring, you can decide how much you can afford in wages. Then reverse calculate into how many hours at what rate you can afford.
Next suppose you want to add a new product or service. Again, examining your current financials can help you determine what the best move will be for your business. If your supplier offers a great deal for something that compliments your current product mix, perhaps it’s a good investment. However, if you don’t have the extra funds then it may be better to pass on the deal.
When it’s time to expand your business, or add on to your “house,” looking at the financials for guidance will help you make a smart decision.
For example, let’s say you own a coffee shop. You’re roasting and selling your own coffee, but you buy food from an outside source. Maybe you realize that you could make more money on the food if you were cooking it in-house. You want to expand your shop to include a commercial kitchen and hire a chef. Before you make any decisions, go back to your blueprint, your financial reports. Decide if you have a strong enough foundation to support the added expense. You’ll have to calculate the potential income and figure out how long it could take to recoup your investment. If you do, then your house will have another new room, making it a nicer place to live and offering more opportunity for success.
Don’t forget to be sure you have a safe roof over your head. Buy adequate insurance and build good reserves.
Preparing for potential disasters is critical. Be sure you purchase the proper kind of insurance so that you are well protected. Depending on the type of business you will need some liability insurance (general and possibly professional), rental or building insurance, and workers’ compensation insurance. There may be other insurance that would be prudent to have as well.
Although money is usually tight when you are first starting out, it’s best to set aside a little as soon as you can and build up your reserves over time. You should have enough money to cover three to six months of an average month’s cost of goods sold plus operating expenses. I encourage you to make saving part of your monthly budget and don’t put it off.
Starting with good financial habits early in the life of your business helps you succeed quicker and ensures longer sustainability. Your business will be built like a solid building: meant to last.