ON RUNNING A BUSINESS || 5 Money Principles for Entrepreneurs
Two decades of entrepreneurship have taught me my fair share of cash flow lessons.
I’ve compiled them into 5 key money principles I am using to run a profitable business, and I’m sharing them with you today.
Poor cash flow management, aka running out of cash, is one of the key reasons why companies go out of business. I’ve seen it time and again, when entrepreneurs miscalculate how much they would need, and a sudden expense throws them off track. Some are lucky and back at it after negotiating loan terms or credit, but others aren’t so lucky. Managing cash flow is an art rarely perfected, but one goal is to ensure you’re in the black and profitable every month, so you can build more reserves in the cash pile.
Over the course of my career, I’ve started and built 3 for-profit businesses and 2 non-profits, and the most important skill to master is cash flow. When you don’t have to worry about money, your mind is free to work on building your business.
1 | KNOW WHAT IS REAL CASH FLOW INTO YOUR BUSINESS
When I was starting my first business, I had the chance to meet many angel investors. Every conversation got me all excited because they would show interest, talk about the dollars they wanted to invest, and then… nothing. My mentor at the time always said, “A cheque not deposited and cleared in your bank account isn’t money that’s yours.”
And even then, if someone hands you a cheque, it can bounce. A cheque that hasn’t cleared is not real money. Money that has been promised but not delivered is not cash flow into your business. I once had a client who was late on their payments for six months. I was reassured that the funds had been set aside for our campaigns and the invoices would be paid. A promised payment is not cash flow. Money not in your bank account is not cash flow.
2 | Calibrate your cash flow timing to give yourself breathing room
Entrepreneurs know that every month, we have key expenses due at different times. Rent and utilities are due at the beginning of the month. Government taxes, CPP, and EI are remitted mid-month, and depending on how many salary periods you have during the year, you may be paying salaries once or several times per month. The timing of your cash outflow is pretty much set. What you owe must always be paid on time.
Now, let’s look at the other side of the coin—what is owed to you. If you run a restaurant and your transactions are mostly sold and paid for at the same time, then your cash inflow may be slightly more predictable than, say, an agency, where clients may have varying payment terms. This means that the services or goods are delivered to the client, and there’s a period before they pay you; the payment may be due in 30 to 60 days, or even 120 days, before you are paid. If you fall into this category, make sure you have enough cash on hand to cover your expenses for 120 days in the worst-case scenario where your client doesn’t pay you on time (yes, it happens often).
3 | Small things add up—SHOULD YOU REDIRECT YOUR CASH FLOW?
The small things add up. The subscriptions add up. The coffees with prospects add up. The snacks in the pantry add up. Is there anything you’ve purchased for the office or the team that isn’t being used? Time to redirect that cash flow somewhere else instead of having it go to waste.
Saving $120/month on team subscriptions for project management or AI tools you rarely use means you can redirect that cash flow to something with a better ROI. I’ve simply asked my team, “Hey, is anyone still using this image creation tool we subscribe to?” If the answer is no and we have another subscription that does pretty much the same thing, I cut it from our budget. Understanding that businesses are likely testing a lot of new AI tools right now, it’s fair to say that you should schedule a quarterly check-in with the team to see which ones still add value to your business.
4 | Who are the revenue, profit, and expense drivers of your business?
Which departments or members of your team are the key revenue and expense drivers of your business? Do you know? There are only a few levers to push in a business to create additional cash flow, and the main ones are your revenues and expenses.
A simple way to think about it is to identify the actions that generate revenue and who is responsible for them. For example, a client wants your company to design a logo, and you assign your graphic designer to the task; the graphic designer is generating revenue, so they are a revenue centre.
Let’s say you also have an administrator who receives packages, answers phone calls, and sets up meetings. Do any of these actions generate revenue? If not, then although their contribution keeps your business humming along, they are a cost centre.
You want to understand how each investment is driving your business forward, which helps you see where your cash is flowing and whether you’re optimizing your allocation.
5 | Figure out if you have enough runway to let you run your business like a sane person
The answer to the question “How much runway is enough?” will differ for each person. To arrive at your number, you can do a quick assessment and ask how many months of runway in the bank would curb your anxiety. Does having enough to cover one month of expenses let you breathe easier? Or does having six months help you sleep soundly at night and not worry about a sudden expense that could drive your business into the ground? Same with other financial decisions: every entrepreneur has a different risk tolerance. The key is to select a point at which you can focus on running the business rather than worrying about running out of cash.
I hope you’re able to take these lessons and apply them to your business or even to how you manage your personal finances. Successful cash flow management will impact every part of your life so that you can eventually live stress-free from money troubles. Isn’t financial freedom in all aspects of our lives what we want in the long-term?
