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EPISODE 048 – Why You Need to Get Your Finances Under Control

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In today’s episode Melissa shares:

  • 4 reasons why it’s so important to get your finances under control and managed.
  • Common money mistakes business owners make and what steps you can start taking now to get your finances under control
  • Why it is important for entrepreneurs to manage their business finances and how it will help you to nurture and grow your business.

Melissa’s passion for helping women entrepreneurs by teaching them how to manage their finances shines through in today’s episode. There is so much valuable and actionable information inside this episode to help you get a better handle on your business finances. You can listen now by tapping the podcast player above, or keep scrolling for the full transcription, references and contact information for Melissa.

If you’ve been in any online space in the past year or so, which most of us have, you likely have heard other entrepreneurs speaking about their six figure, multiple six figure, and seven figure businesses and beyond. They’re touting these numbers like it solidifies their business success. But here’s a little secret, these revenue numbers mean nothing if the business is not making money; making money means you’re making a profit. So in my experience, over many years, I have seen the largest companies go bankrupt due to financial mismanagement. Although having high revenue numbers is absolutely fantastic, making sure that you’re managing your business well, and that it is a profitable business, is the true sign of success. 

My name is Melissa Houston, and I am a chartered professional accountant and business finance coach. I help women entrepreneurs by teaching them how to manage their finances, which is an extremely important area of business, yet often overlooked. I am the host of the Think Like a CFO podcast, and you can follow my column in forbes.com to learn all about business finances. Today I want to talk to you about why it’s important to understand your numbers. First, I’m going to share with you a story about a client of mine named Tracy, when I first met Tracy, Tracy was full of anxiety. She’s a professional, and she had been running her business for a few years. But she was in debt and feeling like a complete failure. She was upset because she knew she was smart but when it came to her business finances, she just couldn’t get it. It was frustrating for her. And she felt overwhelmed, and a little lost and alone. But I hear these stories all the time. It isn’t an unusual story. And I love to help women overcome these types of situations, because it really isn’t as hard as it seems. But what you need to know is you need to have a system and that’s not what people are talking about. Managing your finances isn’t a sexy topic, but it’s weird because having a lot of money is sexy. But, the reality of it is you can’t have a lot of money if you’re not managing it well.

So in my opinion, managing money is sexy, because it leads to more money, which is sexy, and you know what else that leads to? Confidence! And there’s absolutely nothing sexier on a woman than confidence. So let’s touch on a few reasons why it’s so important to get your finances under control and managed. First of all, it alleviates stress. You know that stressful feeling when you realize that you don’t have any money to pay that bill that’s coming in, or you received that surprise tax bill, and you have no idea how you’re going to come up with such a massive amount of money in such a short time?  When you have a system in place there are no more surprises like that. You will know what to expect of your tax bill and you will plan ahead for payments with your cash management system. These are systems in place designed to keep you on top of all things that happen in your business. Secondly, there will be plenty of money saving opportunities. I hear from my clients all the time that they had no idea what they were paying for. There were subscriptions that they didn’t know they had or how much their advertising costs were. And knowing these things, help them save money by canceling those subscriptions and monitoring their spending. Thirdly, when you know your numbers, it allows you to know your business really well. You’ll know how many sales you need to break even, you’ll know which offers are more profitable than others, you’ll know how much money to keep aside for tax payments each month, how many sales you’ll need to make each month to reach your goals and the list goes on. The benefits are really endless. 

The final big benefit on my list is knowing your numbers allows you to focus on profits in your business. High sales numbers are fantastic, but if you don’t have profit that goes along with those sales, then you are putting your business in jeopardy. If you want to be in business for the long term, focus on the profit. The profit is the money that you get to keep in your business at the end of the day. I see entrepreneurs make mistakes and if you’re making these mistakes, I want you to know that it’s not your fault. The reason these mistakes are being made is because you think you are doing everything right but nobody has taught you otherwise. So let me take you through a few common mistakes that I have seen in my clients. 

First, they let their accountant and bookkeeper manage their finances. There’s a false belief that since you’ve hired a bookkeeper to take care of your books on a regular basis, and a tax accountant to complete their tax returns at the end of the year and offer a bit of advice, then they’re taking care of your business. But that is a common misconception. Nobody will ever care about your business as much as you do and nobody will know your business as well either. You are the CEO of your business and you make decisions for your business on a daily basis. But if you are making these decisions without understanding the financial impact these decisions will have on your business, then you are essentially leading your business blindly. Would you drive a car blindfolded? Not likely. So you need to be awake at the wheel of your business. Secondly, they think they’ll never understand their numbers. Maybe someone somewhere told them at one point in their life that they are not smart enough. I call BS on that because all women entrepreneurs are definitely smart enough. If you’ve been smart and brave enough to start your own business, and learn all the crazy stuff that entrepreneurs need to learn, then I definitely know you are smart enough to know your business numbers. It’s that simple, but you need to be smart enough to invest in learning these skills. 

Which brings me to the final mistake I often see. People think there’s not enough time to learn all of this. If you were training to be a CPA, I would agree with you. But you’re not; you are learning what you need to know in order to manage your business finances, like the smart entrepreneur that you are. You don’t need to be a professional accountant to understand your business finances. You just need to learn a system that you can follow and a few key performance indicators that affects your business. So now I want to teach you exactly that. I’m going to take you through the four steps CFO money method framework, which is the foundation for all business finance management. When you have these steps in place in your business, it offers you financial freedom because you will know what’s going on, you have a plan for your business, and you will be able to sleep at night.

So the first step is knowing your financial statements. Knowing how to read the information that these statements offer you is important because it tells you what’s going on in your business, and what you need to do in order to meet a higher level of profit. These are extremely useful reports that help you understand what is going on in your business. There are three common financial statements that you will use; the balance sheet, the income statement and the statement of cash flow. The balance sheet is useful for understanding the wealth in your business, it adds up all your assets, which is anything of value that you own, it subtracts all of your liabilities, which is any money that you owe, and the remaining is the equity that is in your business, which is basically a way to determine the wealth of your business. So for example, if you own $50,000 in assets, but conversely you owe $20,000 in money payments that are due elsewhere, then the equity of your company is $30,000. The income statement is the most commonly used financial statement of the three. The income statement calculates the profitability of your business, it adds up all the revenue and subtract all the expenses and what is leftover at the end is the profit. But be very careful because there is a difference between profit before taxes are paid and profit after taxes are paid. Never forget to leave money aside to pay taxes. The final statement is the statement of cash flow and it is likely the least used financial statement, but it is important if you are applying for a loan or looking for investors in your company. These three statements are what loan officers and investors look for. The Statement of Cash Flow demonstrates the cash flowing in and out of your business throughout the year. This is not what we use to manage the cash flow system. We will talk about that in step four. 

Step two, this is my most favorite business activity. This is where you create the operating budget. It’s also known as a plan for your business. But commonly it’s called the budget. This is an important business task to complete as it is the best way to get your full year’s goals and plans into action. The budget is based off of the income statement and your business. What you do is you break down the budget by month and you plan each month carefully. This allows you to plan your sales targets and the expenses that go into achieving those sales targets throughout the month, then you will see how profitable your business is month over month. But beware if you are not operating at a profit, which means that your expenses are more than what you’re bringing in. This is where you can tweak your budget and make adjustments to ensure profitability. It isn’t uncommon to operate at a loss when you’re starting your business. But the goal of a business is to make money. So you want to ensure that you start seeing money being made before you cannot float your business and you run out of cash. For example, when I first started my business, I used my own personal money, I had a certain amount of money set aside and when that money ran out, I knew time was up so I budget carefully on expenses. Eventually I started turning a profit. But it definitely took me about six months before I really started to see money come in. 

Now the third step of the framework is probably the most important step because the real magic in having your budget, happens as you monitor the progress against that budget. So step three is all about monitoring your progress against the budget that you set up. I really love this part because you can budget all you want, but if you don’t know how you’re actually doing in your business, then your budget won’t be very helpful. So at the end of each month, you are going to fill in that month’s variance analysis sheet, which is just a fancy word for what really happened in that month of business. So for example, let’s say January is over, and your books for January are completely inaccurate. Now it’s time to compare your actuals, which is what really happened in your business. And you compare that to your budget. On this spreadsheet, there is a column for budget, another column for actuals, and a third column that shows how much you were over or under for each category. If you were short on sales and high on expenses, this information is valuable to know. Take the emotion out of that information and adjust it accordingly. The numbers in this report, it’s really just feedback, valuable feedback that you can use and you can proactively make adjustments so that you don’t repeat the same mistakes month after month. It will be very clear on what your profit was at the end of the month, and with that, you’ll be given a good idea of how to budget for your taxes. 

Step four is all about managing your cash. This is an important step as well in the management of your business finances. To ensure that you have a cash management system in place. This doesn’t need to be over complicated, you just need to have a clear understanding of what cash is coming in, what date you expect it to come in, and what your bank balance will be at that time. You monitor the due dates for the cash going out as well, and you monitor your bank balances. I use an Excel spreadsheet template to monitor my cash balance and I plan about six to eight weeks ahead of time. This management system is extremely helpful because if you have a client who’s late with a payment, it will be on your radar, and you can make efforts to collect earlier rather than months down the road. You keep all your finances organized, you know what’s coming in, and you know what’s going out, and if you need to pull from maybe a line of credit or something to float you on cash if you’re a little short at the end of the month, then you can do so. But you definitely need to monitor your cash levels because that is one of the top reasons why businesses go under, because they run out of cash. 

So now we’re gonna revisit Tracy. So Tracy went through this program and now that Tracy is done, she’s a lot more confident about her business. Tracy understands how the money flows in and out of her business now and she has a plan that feels comfortable. She feels confident about the budget that she’s set in place, she has her plan for the year and knows how to monitor her results against that plan. And although not everything will go as planned and nothing will be perfect, Tracy knows that she’s in control and she can help her business. stay the course if she follows this plan. 

So I’m going to leave a link in the show notes so that you can grab a copy of the four step roadmap to biz finance freedom, which is a guide that outlines exactly what I’ve taught you here today.

Would you like to connect with Melissa online? You can find her at www.melissahoustoncpa.com where you can download her 4 Step Roadmap to Business Finance Freedom. On Facebook at https://www.facebook.com/melissa.houston.1420354/ and over on LinkedIn at  https://www.linkedin.com/in/melissahoustoncpa/

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In gratitude,

The Great Canadian Woman inc.™ Team

Melissa Houston

Melissa Houston

Melissa Houston is a Chartered Professional Accountant and a Business Finance Coach with over 20 years of experience. Melissa is also the host of the Think Like a CFO podcast. Melissa is passionate about helping women entrepreneurs manage their business and personal finances so that they can become financially empowered.

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