Last week, we looked at why and how to start leveraging your time to create more freedom and flexibility in your business, and part of that discussion included looking at your business model and in particular your pricing. This week, we’re going to ‘double-click’ on this piece and look at how you can get the financials right in your business.
When I first left my corporate job back in 2013, I landed on my feet with several big consulting projects for well-known companies. I was earning as much, or more, as I had been in my full-time job, but with the freedom to take time off between contracts to travel and do other fun things. Although I was earning a lot of money, however, I didn’t quite have the autonomy and flexibility that I had been after when I quit, and I was still tied to the clients’ offices and to standard (overtime) working hours.
After a couple of years of consulting, I ‘quit’ that kind of work and took my business online, travelling full time to become an oh-so-fashionable digital nomad. I had the most amazing few years, with incredible adventures, experiences and personal growth – but during this, what I like to call my ‘hippy’, time, I wasn’t earning a lot of money and instead I was working through my savings.
My focus these last few years has been on getting the balance right, between earning money on the one hand, and having the “freedom, flexibility and fulfilment” on the other…
The irony is that worrying about money is the biggest reason why people stay in their full-time corporate jobs, despite longing to do something else. They hold onto beliefs that a stable salary from one employer is the safest way to live and work, that freelancing or running your own business is inherently risky and poorly rewarded, and that their mortgage payments and very comfortable lifestyle would suffer if they were ever to quit their job.
It’s easy, then, to go to the other extreme when you do manage to quit your job (as I myself experienced!). You question all those beliefs you’ve held onto for so long, you discover that money is not actually an important personal value to you and that there are many other more important things in your life, and you head off optimistically into the world of working for yourself. You start casually dabbling, paying little attention to your business strategy and income level and just believe that the money will follow from your passion.
The truth, of course, is somewhere in between these two extremes: holding onto a full-time corporate job and stable salary is not the only, or even safest, way to manage your income and financial obligations; but managing your own business so that it meets your income goals takes hard work and focus on the right things.
Money is not an end in itself but something that enables the very freedom, flexibility and fulfilment that you’re after. Earning sufficient and consistent money in your business means that…
So if you recognise that money is important to your goals of creating more freedom and flexibility – now what? What do you need to do in order to get the financials right in your business?
Before even getting to the numbers themselves, you really have to start with your mindset. A lot of us have money ‘stories’ that we’ve developed over the years, inherited from our parents and from our personal experiences. Maybe your parents argued about money when you were growing up, or it was a taboo subject that no one talked about…
As a result, you have a lot of beliefs on the topic of money, beliefs that can hold you back when it comes to running your business successfully. For example:
You can see how these beliefs can become self-fulfilling – if you believe that work that you enjoy is not going to make you a lot of money, then that’s how you’ll go about your business! You won’t even try to make more money – or maybe you think you’re trying but you’re sabotaging your own attempts.
So take a look at your own money story and beliefs, and see how you can start to challenge those beliefs and re-frame them into more constructive ones.
For more on mindset, have a listen to episode 8 of the Reimagining Success podcast, where I looked at 9 mindset shifts you need to make when working for yourself. We’ll also be digging deeper into this topic next week!
Once you’ve worked on your mindset – bearing in mind that this is an ongoing process, not just a one-off exercise – you need to take a look at the underlying business model that you’re following. Maybe you have no business model in place at all, or you have something but it’s not actually giving you what you want and need from your business. As we said when we started this series on setting up your business in the right way, your business model is absolutely fundamental to determining whether or not you’ll get that freedom and flexibility from the work you’re doing.
In this context, important aspects to consider include…
This is a massive topic, and will require quite some strategic thinking and validation, so take your time and make sure that your model reflects your goals on the one hand, and that you’re translating it into daily, consistent action on the other.
You may be a maths whizz who loves Excel and/or gets excited by budgets and income targets and accounting reports… If not, however, you don’t want to be sticking your head in the sand and ignoring those numbers altogether! You don’t need to become an accounting expert, but you definitely need to understand at least the basics of how your business works, what you’re spending, and what you’re actually earning.
A quick Google of business finance gives you all sorts of detailed articles on your balance sheet and your P&L (profit and loss statement) and, while these are important (especially if you set up a limited company), you can start with the very basics:
o One-off set-up costs as well as ongoing costs, which may be fixed or variable
o Different categories e.g. web hosting and software, accounting, training
o Your sales targets (e.g. based on x clients at y price, you are aiming for z sales this quarter / this year)
o Your sales actuals (what you actually make each quarter)
If this is an area where you’re not at all comfortable, you should really consider getting an accountant to support you so that you don’t make any costly mistakes.
You can also check out my pricing strategy ebook, a short guide to setting your income targets and pricing your services accordingly: Sign up to get the ebook here >>
Of course, it’s not enough to create a business model with income targets and pricing once and then, phew, forget all about it! While it can be disheartening when you’re just starting out to see that you’re not making a lot of money, it’s much better to face this reality head on and then to really put in the effort and get the help you need to step things up and get on a growth curve – rather than ignore it and just hope for the best.
In terms of what you should be tracking, aside from the obvious expenses, sales and profit numbers, you could also consider:
Remember also that results are never instant: the work you’re putting in today will take at least three months to show up in your business (whether as more traffic to your site, more leads or even more sales), so be patient and keep doing what you’re doing even when you don’t see the impact right away.
Finally, a word on your overall approach to your finances…
Traditional accounting, as highlighted above, uses the simple equation:
sales – expenses = profit.
However, in this model, there is no guarantee that you’ll make any profit at all and, as you increase your income, you’re likely to be spending more as well, investing in fancy new tools, and so on. (This has always been my experience personally as well: when you get a salary increase as an employee, the danger is that you simply increase your spending habits accordingly!)
A newer model, put forward by Mike Michalowicz, flips this equation so that you get:
sales – profit = expenses.
This model is based on “paying yourself first”, putting aside any tax due and then taking a predetermined percentage of profit from every sale – and only then using what’s left to spend on everything else. This also means that you’re making sure that you’re eliminating or at least minimising unnecessary expenses that can easily eat into your profit.
This whole topic of financials is a huge topic, but I hope this has given you at least some pointers and new insights to help you begin to get your financials to where they need to be for you to achieve your personal and professional goals with your business.
Next week, we’ll take a step back from the concrete strategies and tactics of your business to look at your mindset and how that can be so critical to getting you what you what for your business.
If you find the financials a bit overwhelming but you recognise how important they are and you’d like to get on top of your numbers, then get in touch to book a free consultation with me. We’ll look in particular at the core elements of your business, including your client target, packages and pricing, and how I can support you in adjusting your model to create more freedom and flexibility.