4 Things Business Owners Must Think About and Create in Their Business to be Successful

Natalya Itu

March 1, 2016

4 Things Business Owners Must Think About and Create in Their Businesses to be Successful

There are so many of us who, everyday, want to create a business; however, the majority of us are failing due to various circumstances. In my opinion, this happens due to four major reasons, which are failures to follow the below mentioned rules:

1. Business Separation from your Personal Assets and Yourself
2. Accounting Lesson - Know your Numbers
3. Cash Flow is King!
4. Utilizing Leverage is a Way to your Unlimited Business Potential

1. Business Separation from your Personal Assets and Yourself

What does it mean to separate your personal self from your business? I am not an attorney here to advise you on your legal consequences, how you can get sued or how much you can get sued for if something goes wrong. Though, I can tell you that creating a limited liability company with your state, obtaining an Employer Identification Number, and opening a separate business account for your business are three things you should do. If your intention is to grow your business and treat it as a business, separation of your business from yourself is a must. This not only creates an additional legal protection, but it also creates better clarity for yourself and your tax and accounting records. When you have a separate bank account and use it 100% to deposit your business income and pay all your business expenses, your accounting is captured in one place by at least 90%.

Getting an EIN (Employer Identification Number) will allow you to start creating your company’s business credit, pay your employees, file payroll reports, and have a separate business account. If your business is an LLC, it provides an opportunity to file a retroactive S-election for your business should you need one. You should start thinking about it when your business makes about $30,000 to $40,000 in net income. Moreover, I believe it is a good practice to have a separate business entity if you are planning to be in the business for a long time.

2. Accounting Lesson - Know your Numbers

What do I mean by suggesting that you, as a business owner, should know your numbers?

That means that you need to know how much you made per week from your business per month and how much your expenses are. You will be surprised how many people do their accounting only once per year because they need to complete their tax returns. Only then do they know what their income was and how much their expenses were. If you are taking your business activities seriously, you need to meet with your accountant or learn how to utilize accounting software on a regular basis, so you can tell whether you are making or losing money. You will also know how much of your expenses were needed, how much you could have done without, and also which of your clients are profitable for you and which are not.

As I already mentioned, having a separate business account and depositing all revenue there and using it to pay all your expenses, will help you to keep all your records in one place. I also suggest that you utilize accounting software such as Quickbooks, Freshbooks, Sage, or Xero. I also suggest that you utilize it via the internet. For example, our clients use QBO (Quickbooks Online) where they share their files with us, their accountants. By doing so, we can see in the real time how they are doing financially, we can do their journal entries in the real time as well as bank reconciliations. By sending them their monthly reports, our clients stay focused on how much they make, tax planning becomes easy as well as budgeting and growth projections.

When you know your numbers, you become more intentional about your business, its growth and its wellbeing. So, if you want to be successful in business, know your numbers! It will also prevent internal issues such as embezzlement or fraud.

3. Cash Flow is King!

You can make $1,000,000 in revenue but you can go bankrupt before you receive this check. Therefore, cash flow is KING! Cash flow is essential and the most important part of your business. Applying proper methods for billing customers and clients as well as collecting your money is an art in itself.

First of all, you want to make sure you charge your customers a healthy, 'fair market value' rate for your services or sell your products at a valued price. Before you establish your price, you need to do a 'break even' analysis to determine all your fixed costs and variables expenses related to creation of your product or service. You want to make sure you don’t go broke at the price you are charging. When you don't charge your clients enough for your services, because you are afraid that your will lose your customers, you operate on a fear-based mindset. Ultimately, it is a short term solution that worsens the problem. By charging less, you are attracting clients who do not appreciate your services or your products. By not having enough cash you cannot afford to invest money into your professional development as well as your company’s growth. So, who are you doing a favor? I have seen CPAs (who should know better in my opinion), charging ridiculously low fees for their services. What happens? People get lots of IRS notices, because no thorough job was done. Remember good work is not cheap and cheap work is not good! Also remember, great products and services are never on sale!

Once we establish price points, let’s briefly discuss your cash collection techniques. Always think of the ways to make it easy for a client to pay you. Accept credit cards, checks, take retainers, and give discounts for early payment. Always pay attention to your Accounts Receivable Aging report in Quickbooks! Review this report on a weekly basis to see who is behind on their payments and establish and implement collection procedures.

On the other hand, pay attention to your cash outflow, by watching your expenses, plan your payments in advance so you always have money to pay bills, utilize vendor discounts (you will be surprised how much revenue it will add to your bottom line), and pay attention on the invoice dates to prevent becoming behind on your bills. I also suggest to apply for a line of credit for your business, just in case. I would not suggest utilizing credit cards as it will have a negative impact on your business. You should develop good systems and practices on handling cash collections and payments.

4. Utilizing Leverage is a Way to your Unlimited Business Potential

The last item I would like to discuss is leverage, what it is, what it can do for you and how far you can go. Trust me, by doing it right, you can go far! Leverage is the term we use for using other people’s money, time, and developing and automating systems.

Word of caution here, in order to use leverage, abundant thought is required! Why? Because you need to invest first in your people (employees), systems and team members before you see results. It is the next level, the upper level in business growth and development. However, this is the most expensive and also the most effective, if done properly. Leverage can multiply your business ten-fold in a short period of time and provide you not only with great cash flow, income, and freedom, but with peace of mind, knowing that you have succeeded.

Lets talk about different types of leverage. The are several ways to utilize leverage and it can cost you more than you expected, sometimes. I believe it is still a good idea to use leverage if your time is more valuable than the money you pay to get it done, if you know you cannot get it done, don't like doing it or if you just don’t have enough resources (your time or money for example). You can use leverage with people, systems, automation systems as well as money.

People - Employees who perform day-to-day operations in your business, such as dealing with customers, deliver services and goods to your customers, or collect cash and pay bills in your business. You might also implement a team of independent professionals (freelancers from for example) such as a CPA, Attorney, Marketing Strategist, etc. Whoever you may need to turn your business ideas into reality.

Systems - Every successful business should have written systems regarding service/product delivery and other business operations. Not only does it create a consistency in product or service delivery, it eliminates miscommunications, minimizes frustrations with employees, increases efficiency and creates happiness in general. When businesses do not depend on the opinion of one person (who becomes indispensable) in this case, it also creates freedom for the business owner. Just imagine, you are a business owner, and you can leave your business anytime and go anywhere knowing that it will still be functioning as it was before you left and all will get done. Just imagine! What a relief! I cannot wait to finish writing my business systems then provide grandiose training for my team members, so I can do this too!

Automation in marketing - With new technologies and marketing solutions, business owners can promote their services and products by utilizing prescheduling techniques, selling their products online while asleep and collect cash without significant effort. Therefore, each business should consider how they can structure and use what is readily available out there to increase social media visibility and increase sales. This is a very good time we live in!

Other Peoples Money - If you are in the real estate business or taking your business to a whole new level quickly, using other people's money could be a good idea. This is why reality TV shows such as Shark Tank are popular. Investing in real estate would require leverage, unless you are an independently wealthy, cash-rich individual. Bringing in new partners with cash also gives you leverage by not only utilizing their time, but their cash as well.

Depending on the situation though, keep in mind some of the leverage techniques might require you to lose your control over your business. Therefore, careful consideration is a must!

Good luck to you on your business journey! I am sure it is very exciting and uplifting! Always keep growing and developing yourself and your business. I am sure you will become a great success if you are not already there!

Colorado Business CPA

March 2016

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