As an entrepreneur, you must possess creativity and leadership to realize your innovative ideas and grow your business. But for sustainable progress, entrepreneurs must learn to master financial discipline. Any venture can achieve stability, sustainability, and profitability through positive financial habits, even in challenging market conditions.
Let’s learn five essential financial habits and practical tips that can help every entrepreneur grow as an individual and business person.
1. Manage Cash Flow
It goes without saying that entrepreneurs must prioritize their cash flow. The very basic thing you should learn is to gauge when you start earning profit. This isn’t something you should be guessing about. You should set realistic goals when you break even. However, keep in mind that your venture shouldn’t revolve around profits. Cash flow management should always be a priority. Yes, profits help you survive, but your business might fall even before you start earning profits if your cash flow isn’t organized.
Moreover, you should secure credit ahead of time instead of waiting until you need to secure one. You can seek funding from many credible, quick and easy loans online, besides traditional financial institutions like banks and credit unions. This way, you can be prepared for the unexpected as you have sufficient reserves secured through credit.
Also, consider using dedicated software to manage your finances. Many accounting software programs are available today. Ask around and decide which dedicated systems can help you stay on top of your financial dealings.
2. Set Solid Financial Goals
To establish financial goals, you should start with your business strategy. Harvard Business School Online defines business strategy as “strategic initiatives a company pursues to create value for the organization and its stakeholders and gain a competitive advantage in the market.”
You must objectively assess the organization and connect your financial goals to the business strategy. Once you have set your strategic goals, consider aligning financial goals with a long-term outlook. For example, if you want to buy five company vehicles after five years, consider your financial plans to achieve that goal.
Now that you’ve considered your long-term goals, it’s time to break them down into short-term financial goals. Looking at our example of purchasing five vehicles in five years, you must target acquiring one vehicle every year to realize this goal.
3. Plan a Detailed Budget
Planning a detailed budget is one of the most crucial financial habits every entrepreneur must prioritize. With a budget, you can plan when and how to allocate resources. But you should consider that making your budget doesn’t end with listing those specific items, knowing their costs and identifying where to get them are essential. It’s mostly about knowing how to make it work for you.
Planning your budget is a continuous process. So, you must regularly update your budget and ensure it’s tailored to your business’s current situation. Expenses fluctuate, so you must be flexible when allocating a budget. For seasonal businesses, you must learn to adjust your budget before the off-peak months, when sales may be slow.
You’ll know you’re doing well in budgeting if you can identify areas you can reduce without hurting operations. There are many budgeting software programs for different business sizes, so ask around so you can automate expense tracking while you focus on strategic decisions.
4. Monitor Key Financial Metric
Business isn’t just about profit and revenue. There are many key metrics you should be aware of. Monitoring these metrics helps you understand your business’s financial health to take more strategic actions and decisions. One of the significant indicators of your business health is Gross Profit Margin. This measures efficiency in using supplies and labor to produce goods and services.
Another critical financial metric you should know is Net Profit Margin. This shows how much revenue translates into profit. Thus, it empowers you to sustain profitability, even in dynamic market conditions. There’s also Return on Investment (ROI) which assesses the efficiency of an investment against other investments you have. With this metric, you can identify whether your investments in different areas of operation, like staffing, equipment, and marketing, are paying off.
These are just the most basic financial metrics you should monitor and understand. Keep in mind that it’s not just the big numbers. Take time to monitor smaller ones, too. For example, you should also look at figures like customer acquisition costs. This would reveal whether your marketing strategies need adjustment or change.
5. Don’t Mix Personal and Business Finances
As an entrepreneur, you must keep your personal and business finances separate. This way, you can avoid mixing business finances with your own financial habits. This can also serve as an audit defense. The Internal Revenue Service (IRS) is likely to perform audits when small business owners start claiming home office deductions. It’s a major red flag you’re prone to commit when you keep mixing up personal and business finances.
One of the key actions you should take is to get a dedicated business bank account. You should also be extra vigilant when it comes to allocating funding. Ensure you’re getting the funds for business operations from your bank account. It would be best to establish a salary so you don’t risk getting money from company funds to cover personal expenses.
Most importantly, keep detailed records if you use your personal money for your business operations. This way, you can have these records for accounting.
Wrapping Up
You’re living two lives as an entrepreneur — as a businessperson and an ordinary individual. So, build habits that can suffice these two different roles. These five habits we’ve covered here are just the tip of the iceberg. You’ll learn more financial tips as you talk with other businesspeople and experts in your field.
Learn that connecting with others, especially those with experience, helps you improve in financial management and holistically as an entrepreneur.