Business and Finance 101

Get Your Money Right!

I’ve had a large number of requests to write about business and personal finance. So many thousands of books and essays have been written on these subjects that I feel it will be difficult for me to add much more. However, I will cover a few crucial areas that I believe most businesses and households neglect when it comes to managing finances. The subject of money is often stressful, so I understand the temptation to avoid looking at your bank account and just praying that it will all be ok. Every time I get hit with a huge tax, fee, rent increase or my businesses have a lousy month for revenues I feel the stress as well. However, if it’s one thing I’ve learned, pretending it will all be okay without any strategy or action to back it up is useless. As Jim Rohn liked to say, “You can’t go in your garden and chant ‘there’s no weeds’!” The weeds will grow right up over your toes if you don’t recognize them and pull them out. So, here are the areas I think most households and businesses should pay attention to on a weekly basis:

1. Cashflows and income. It’s absolutely imperative that you track your income regularly. If you are in business, this will help you identify trends throughout the year and allow you to plan accordingly. If you get paid a paycheck once or twice a month, count that too. Make sure that you’re netting the correct amount. I can’t even tell you how many people I come across that don’t know how much was in their last paycheck. The same goes for business. Most small business people I know don’t know how much they made last month! They just keep grinding, spinning their wheels and getting nowhere! I’m asking you to keep track of the amount of money coming in on at least a weekly basis. If you only get one paycheck monthly, try to increase your streams of income so that you are getting paid multiple times a month from different sources.

2. Expenses. How much does it cost to run your business every month? How much does your family spend monthly? From my experience, the majority of people sorely underestimate their monthly expenses. Every business and individual should have a very detailed breakdown of every single category in which money was spent. Once you see how much you are actually spending, I guarantee it will be eye opening. When it’s all said and done, how much money did you have left over at the end of the month? Everything else was an expense that needs to be accounted for. If you had a little too much “month left at the end of the money” so to speak, it’s time to cut back your expenses and try to simultaneously to increase your income. If you can do both, you have discovered the fastest way to becoming financially free.

3. Know your numbers and what they mean. TRACK EVERYTHING!!!! This is the area that most businesses are neglecting. For example: what are your payroll hours as a percentage of revenues? What about rents as a percentage of revenues? What is the lifetime value of a new customer? How much new revenue does a new client produce in their first transaction? How much revenue does each billable payroll hour produce? What are the total costs per operating hour in your business? How much net revenues or expendable income are you left with at the end of the month? What is your best quarter for growth historically? How much are your COGS, or Costs of Goods Sold? You must know the answers to these questions and more if you want your business to succeed for longer than just a few years.

4. Work on your business and not in your business. If your business depends on your daily efforts to succeed, you are self-employed. You do not actually own a business. There’s nothing wrong with that either, just don’t be fooled into believing that you are an entrepreneur when you’re really working 80 hours a week and only making a few thousand a month. You may just be the lowest paid employee in your business. A true business owner spends most of his or her time reading market trends, strategizing, optimizing systems and making sure the business follows the regulatory and tax requirements. If the owner is not present, the business should still function well. The owner simply works to optimize the profits and expansion of the company and then decides how best to spend or reinvest the profits.

5. For households, follow the 70-10-10-10 RULE. When you determine your monthly profits or wages, never spend more than 70% of the money you earn. This includes all expenses like housing, cars, insurance, food and entertainment. 10% of your left over money should go to active capital, or starting your own business, which will produce additional monthly income. 10% of your income should go passive capital, or an investment run by others that will produce monthly passive income. The last 10% should go to charity or helping others that you care about. I strongly believe in this last one because the secret to living is truly giving. Helping others succeed will result in you doing even better. What goes around comes around and when you help others, you will reap the benefits. (If your monthly expenses are taking up more than 70% of your income currently, work immediately to reduce your expenses and increase your income. Eventually, as your income increases greatly, your expenses may only by 50%, leaving you with more to invest in businesses and spend more on helping others.

6. Know how much it costs to acquire a new customer. Track your marketing ROI, or Return on Investment. Many companies with advertising budgets are not properly tracking the lifetime value of a client, the efficacy of their marketing, or the total cost that goes into acquiring a new customer. I have made this mistake many times. I’ve spent hundreds of thousand on marketing without calculating my exact return from the ads. My new rule is that if I spend one dollar in advertising, it must produce more than a dollar in revenue in the first month. Other companies use a longer time frame as their metric depending on what they sell, but this rule has helping me control my marketing costs significantly. I also focus as much as possible on direct marketing so I can track who is engaging with an advertisement and then I can subsequently track what marketing pieces led to new clients. Another cost associated with new customer acquisition is the payroll hours it takes to call prospects and past clients, and the creation of media (such as signage inside and outside the business), etc. Just be sure to track all costs associated with new customer acquisition. As a general rule, the companies that can afford to spend the most to acquire a new customer and then have that customer produce higher than market average revenues for the business will win!

7. Love the business you are in, but fall in love with the customers more. Business is hard, so it helps greatly if you are passionate about the business you are in. I love health and fitness and bodybuilding, so this is easy for me. But I’ve learned that companies do best obsess over their customers, rather than the products or services they produce. Customers are the ones who pay all the bills at the end of the day. They are the real bosses. Every one needs to feel special or significant, so if a company can solve a problem with their products while making the customer feel special, they will do better than companies who do not.

8. Know the difference between good and bad debt. We live in a debtor nation. The country itself has a 20 trillion dollar federal debt and household debt is at record levels. Debt cycles are the reason for booms and busts in economies and a business or family that takes on too much debt will face significant financial hardships. However, there is a difference between consumer debt and business debt. The latter is a type of debt that produces income and is paid for by others. For instance, if I take out a mortgage to buy and apartment complex that produces cashflow, the tenants are paying for that debt. I am using the debt to create profit. This is called leverage and can be a good thing if used wisely. Consumer debt on the other hand is debt that is paid by the debtor. This includes home mortgages, student loans and auto loans as well as most credit card debt that we are familiar with. Do not let debt sink you or your business!!!! Go back to the 70-10-10-10 rule and see how much of your monthly expenses are debt service, or paying back money you’ve already spent.

There are so many more business lessons, but I think these eight rules are a great start for any business owner or head of the household. I’m hoping any of these tips will lead to financial abundance for you and your family for many years to come.

In health and riches,

Sean

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