Half of my career, I’ve been an entrepreneur. As such, I work on my business, and I read about goal setting, self-improvement, and personal development. Many of my colleagues do the same thing reading books on best practices and conditioning their minds to operate in new realities.
If you want your eyes opened in a way that can immediately impact your scale plan, allocate just a fraction of your time to study the finances of your business. You can read the stories of others, or you can learn to read your P&L and Balance Sheet.
Put your money where your money is
I have always been the kind of person to read about new things to get ideas. I work on implementing what I learned in a “put your money where your mouth is” fashion.
When I had the opportunity to take an entrepreneurship certificate course, I first thought, “Why would I study that? I’ve been one for a long time, and I write about it constantly?”
It is natural to think you already know plenty about your own situation, and you need to focus on learning new things.
But my perspective on this has changed. Just four weeks into my 4-month program on entrepreneurship, and I realize how much I have to learn and study about my current financial reality.
The answers you’ve sought in books and the counsel of others can be found by spending one hour with a worksheet, exploring the most relevant insights you can glean about the prospects of success.
The Pro Forma model of reality
We often focus on one or two of the following numbers because they are interesting to us and assign the rest to others or simply ignore them. Look at all of these and see what they reveal:
- Initial units sold and monthly growth rate – Be real about what you can sell and how well you can replicate and consistently grow your sales volume. Don’t use “rules of thumb,” actually see what statistics you are trending at and plug them into the model
- Price per unit – This may be wildly variable over time. You may need to gives things away initially and increase prices over time. Use a realistic number, not the best case.
- Cost of Goods Sold (COGS), Fixed and Variable Administrative expenses – Make sure you understand all of the costs that go into what you do. And then, don’t just get trapped in job costs, look at how you’re approaching your spending more broadly. Are you flying all around the country, did you get Class A office space, are you paying generously and offering options. Your business has to be able to sustain itself based on all your spending habits, not just your fixed job costs.
Too often, we stop at the above…but keep going.
- Income Tax – It is critical, particularly if you’re planning growth and generating profit to understand what tax burden you are carrying. It is easy in the first few years, when profits may be non-existent to forget that profitable success carries a heavy weight in taxes.
- Initial Capital Invested – Many times, the founder just views these bootstrapped early investments as sunk costs. If the investments were from outside parties, you would understand these need to be paid back by a profitable business once operating. Don’t treat yourself, and your own seed investment, any differently. Build a model that will pay you and all your initial investors back.
A good pro forma model or worksheet will help you through all of the above and give you a sense of the areas that your unit economics or approach to spending or investing may need fine-tuning.
Who wins in the end?
In the end, it is what we learn about ourselves, and what we continually do to shift this into a more positive state of being, that predicts success.
If you learn to read your financials, it will tell you a story about success and failure. It will show you more about chaos and control than studying any double-sided Kandinsky ever will.
It’s good to lift your head and look outside yourself and your business for wisdom. Just remember that you will never obtain the ultimate payoff if you can’t interest yourself in your own financials—and what they are screaming at you.