Great ideas don’t always translate into successful businesses that what business owners should know. Consider the case of Nikola Tesla, a brilliant man who died with a net worth of less than $100. His rival, Thomas Edison, had a cool $12 million when he passed—the equivalent of $170 million by today’s standards. Both had brilliant ideas. Edison was financially savvy. It makes a difference.
We could go down the rabbit hole and argue about Edison’s unethical business practices, but the point is that understanding finance will make you a more successful businessperson. We’re not talking about personal finance like the debt avalanche method or budgeting home expenses. Business requires a financial strategy. Here are some examples:
1. Try the lean startup method
Thomas Edison is also famous for saying, “I didn’t fail. I just found two thousand ways not to make a lightbulb.” Tom was a pragmatist. He knew he wasn’t likely to get it right on the first try, so he left himself bandwidth to try again—multiple times. Translate this into a funding perspective. If you use all your startup funds on the first try, you’re broke if you fail.
There’s a technique called the “lean startup method” where new business owners take an existing product and spend a small portion of their marketing budget to test consumer appetite. If it fails, you can tweak or replace it, and try again. This is particularly difficult for newbies because they almost always believe they’re doing something innovative.
2. Pay yourself first, no matter what
Business owners who aren’t getting paid don’t have a business. You can justify putting all your money into something because you “believe” it will be successful at some point, but that’s not a financially sound way to think. Plan to draw a salary from the day you open. It should be part of your business plan. Without this, your quarterly financials will be inaccurate.
On the flip side of this, don’t overpay yourself. Extra profits should be reinvested into the company to facilitate growth. That’s also an important attribute for a small business. There may come a time when you want to sell or take on an additional partner. Showing growth in your financial reports is how you can get the best price when that time comes.
3. Outside financing is a good thing
Spending your own money to get a business up and running may seem like a good idea. It’s not. Your business and personal finances should be separated. Those who confuse the two will often suffer in both areas. Spending personal money on business can leave you short on your basic living expenses. Spending business money on your personal needs is a recipe for failure.
Go to the bank and take out a loan. Apply for a credit card in the business name. Treat your business the same way you would a person trying to build a good credit history. Use outside funds to build it and deal with profits and losses accordingly. If the business fails, you’ll still have all your personal assets to fall back on.
4. Itemize expenses and focus on ROI
Ask yourself what your return on investment (ROI) will be. That goes for all expenses, not just the obvious ones. This suggestion is all about learning how to think like business owners. If you buy copy paper, how will it be used and what’s the potential profit on that use? The answer might be an estimate, but that’s OK. It’s the thought process that counts.
Successfully running a business requires financial awareness. You don’t need to be an accountant or financial advisor, but it’s important to understand money and how it should be managed. If that’s not your strength, hire a business manager. If Tesla had done that, he might have retired as a millionaire. Don’t fall into the same trap he did.
Kevin Flynn
Kevin is a former fintech coach and financial services professional. When not on the golf course, he can be found traveling with his wife or spending time with their nine wonderful grandchildren and two cats.