Finances are a very integral part of the entrepreneurial journey. You can have the best marketing program but without a solid financial system, you never seem to move forward. Any business that is going to survive the long haul must have a financial system: A financial system affects every area of the business, and works hand in hand with the marketing and operational system. While having a financial system will not prevent adversities from affecting your business, it will give you a more solid anchor in handling the adverse events that come your way.
Building a solid financial system
In order to build a solid financial system, it is best practice to start with a plan of what you want to achieve. Once you develop a map, you can begin to define financial systems as discussed below:
A mapping system i.e. an overall strategy
Without a clearly defined purpose, a business might as well not exist. A purpose is the filter that clarifies what opportunities to accept and which ones to reject. Once you determine what you do, you can focus on allocating resources to what matters while minimizing waste.
Define your revenue generation system:
Any business that is going to survive needs customers and a system to reach and maintain them (marketing). Revenue generation is the system of bringing in paying customers. For your revenue generation system to work you need a system of getting (customer acquisition) and keeping customers (customer retention). Projected revenue is a function of your marketing and operating systems and is expressed as follows:
Sales pipeline * Conversion rate= Acquired Customers
(Acquired Customers + Existing Customers) * Retention Rate = Total Customers
Total Customers * Average Sales * # of repeat sales per customer = Total Revenue
Total Revenue – Cost of goods sold = Gross profit
Gross profit – Operating Expenses = Net Profit
The revenue equation simply states that the bottom line of any business is you need paying customers who choose to patronize you over extended periods of time. It will be hard to build a business if you consistently have to look for new customers with no recurring revenue.
Define your cost structure
A cost structure is the relative ratio of fixed cost to variable costs. A cost structure is important because it allows you to minimize your costs by clearly defining your cost objects. Understanding your costs behavior, prompts you to look for the best deals. This also enables you to stay away from expenses that don’t increase your profitability.
Generate regular financial reports
Having a good financial system means investing in a good accounting information systems. Also, you will need to educate yourself on basic financial knowledge so you know what the numbers mean in your business. You should also have a budget with which you compare your actual results from time to time.
Optimize
Lastly, develop metrics to monitor set goals. Metrics are the first indicator that something is wrong. When a metric does not give the expected results, investigations will need to be conducted to find out the cause.
The journey from idea to financial independence is never an easy one. It is filled with lots of uncertainties, difficult decisions, impossible paths, etc. Not having the right financial systems in place adds to the difficulty. Lack of financial education limits what we can achieve through our business.
Challenge yourself to move beyond your comfort zone. Increase your financial IQ!