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, you can 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 so you have enough product on the shelves to sell, just take a look at your financial reports to determine not only how much money you have available to make that investment, but also the record of your recent sales to predict how much you will be able to sell.
Using your financials as your blueprint to decide how you want to grow your business will 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. You’ll need to keep in mind the cost of payroll taxes, workers’ compensation insurance, any extra benefits you might offer, or any support equipment you might need for the person.
Once you’ve determined what expenses are included in hiring, then you can determine how much you can afford in wages, which you can 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 you are offered a great deal by your supplier for an item that goes hand in hand with your current product mix, it might be a good investment, but if you don’t have the extra funds then it might 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 and you’re roasting and selling your own coffee, but you buy food from an outside source to go with the coffee. 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, and 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. But if you do, then your house will have another new room making it a nicer place to live and offering more opportunity for you to succeed.
Don’t forget to be sure you have a safe roof over your head by buying adequate insurance and building good reserves.
Being prepared for potential disasters is critical. Be sure you have purchased the proper kind of insurance so that you are well protected. Depending on the type of business you will likely need some liability insurance (general and possibly professional), rental or building insurance, and if you have employees you are required to have 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. It’s recommended that you 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 will help you succeed quicker and also ensure longer sustainability as your business will be built like a solid building: meant to last.