Part 2 | How to Think about Your Business
Welcome to Part 2 of Entrepreneurial Bookkeeping. Check out this video for a quick overview before we jump in:
This module alone is worth the price of admission if you start applying the concepts right away. The biggest deciding factor in the results you get from your business is how you think about it. Literally, the thoughts you have determine the results you get. We are going to teach you how to THINK before we tell you what actions to take.
Introducing Lead Reports
In this part of the course, we’ll talk about lead reports in detail. The purpose of these reports is to help you make very clear decisions on how to invest and how to spend your money to create the most long term profit. This course is about taking a long term investment approach to your business and your life, so you can create something sustainable and enjoyable. We aren’t going to teach you any short term, quick fix solutions. Investing means playing the long game. When you buy stock, you invest in assets. They make you money, because they grow in value and are either sold or earn you dividends. We don’t look at buying stocks as spending money, or as an expense, but rather as investing.
Financial intelligence is one of the most important qualities to have as a businessperson. We define it as the understanding of how to acquire money and what to do with it once you have it. We are going to jump right to the important part here: you get money when you acquire assets and use them to maximize profit. Financial intelligence is knowledge of how to do this, and we’re going to teach you that here.
We already covered assets and investments in Part 1, but because they are so important for this module, let’s go over the basics again. An asset is something that directly creates revenue for your business. The more assets you have in your company the better, and there are multiple types to consider. You’re an asset yourself. Others include capital; courses, books, programs, and video series; employees; and customers.
Growth and Profit
You need to think about your business in terms of two main things: growth and profit. If your business isn’t making good profit and isn’t growing, you don’t really have an entrepreneurial business. Instead, you’ve effectively just created a regular job for yourself. What makes business so freeing is your ability to create much more money than you can as an employee and to grow it at a rate that is unheard of for people waiting for a raise or a promotion in the corporate world.
In the beginning, you have to give up the employee mindset for an employer one. In the early stages of your business, you need to sacrifice excess profit in order to grow. Despite what you might have heard from start-up venture literature, if you’re not going to sell your business any time soon, profit really does matter once you become established. We don’t want you to be so profit conscious at the start of your business, however, that you hold back from reinvesting into it. You need to grow it to see its full potential and give you the biggest possible profits later. We encourage you to see your business as an asset that produces a Return on Investment (also known as an RoI). Invest in that asset as much as possible until your business matures and creates ongoing, consistent revenue.
People often look at marketing/growth investment with the intention to break even first, thinking of customers as expenses before anything else. You shouldn’t think that way; instead, think about business in terms of how much you invest in marketing and what it takes to break even on that investment, then how much profit you can get from the back end after that. Make sure profit is always your aim.
You have to pay to earn your customers. The goal is that they will pay you back and then some, which is how we determine profits. If it costs $1k to acquire a customer, for example, it’s important to see that as an investment into customer acquisition. If my customer then pays me $3k for a six week program, I’m breaking even after the first two sessions, meaning that the remaining four are profit. This is a very good RoI. If you think of the customer as an investment, then this deal gets you a 200% return. Once you establish a formula for doing this consistently, focus on investing your money back into growth so you can continue to gain customers at these strong rates.
- Marketing is an investment in your customers.
- Knowing your point of breaking even is important.
- RoI is what matters when we consider what to spend on marketing.
Most businesses run on the Lag Method, using lag reports to make decisions. This means they look at what happened one to two months ago to decide what to do this month. There are many problems with this method, which is why we encourage you to make proactive adjustments and decisions using forward finance, instead of the reactive ones that you have to make using lag reports.
You can do this is by creating a lead profit report that tells you your profit ahead of time instead of waiting to see where you end up. Most bookkeeping has you calculate revenue first, then expenses, to see how much you have left over for taxes, profit and growth. This is the WRONG way to think about your business. Instead, decide ahead of time how much you want to take out in profit, how much you need to save for taxes, and how much you want to reinvest in growth. Lead profit reports are the perfect tool for this, but before you start using them, you need to think carefully.
To start, plan your revenue. If your revenue is predictable, you can plan for exact amounts of profit, taxes and marketing investments ahead of time. If it’s unpredictable, simply choose the percentages ahead of time and treat the money left over as your expenses budget. Instead of deciding expenses in advance, they’re the last thing to be decided. This approach truly changes everything. We again highly recommend Mike Michalowicz’s book Profit First as an introduction to this concept. While we don’t agree with the author’s claim that you need a bunch of separate accounts for everything, we do love the idea of choosing to put profit first. We have added to his ideas by adding taxes and growth to the mix.
Forward finance is about looking ahead and setting finance goals for revenue, profit, taxes, and marketing, so your decisions about expenses are logical, based on real numbers. This makes it easier to make business and financial decisions, like: What can you afford? When do you hire help? How much do you pay for contractors and other optional expenses? Keeping this all in mind will set you up for success, in business generally, and in the modules to come.