This is a super important but not sexy topic. I know that's a heck of a way to get your attention. You're probably thinking, ugh, this post sounds like a snoozefest. It's OK if you feel that way, but hear me out. I often get asked about what business books entrepreneurs should read, and I frequently recommend Profit First by Mike Michalowicz.
Profit What? Profit First. It's a super simple bookkeeping and accounting system for small business owners to follow that allows you to ensure that YOU GET PAID. Getting paid might seem obvious, but many small business owners don't earn a living. They're spending money on things that don't matter, they're spending more than they bring in, they're not sure what they're bringing in vs. what they're spending, and they end up spending their way into the poor house and having to go back to get a j-o-b.
Sadly, up to 50% of new businesses will fail in the first five years. 30% of them will fail within the first two years. That's a scary statistic. Why do new businesses fail so quickly and at such alarming rates? Often, it's due to an issue within money in vs. money out. They grow too rapidly, and the revenue can't keep up with the expenses. They may be making money, but they're spending it as fast, if not faster than it's coming in. They're buying tools they don't need or can't fully utilize yet.
I recently met with a potential client, and she was in this scenario. She was dedicated to her business but wasn't making money and was afraid she'd fail. As we talked through her business and marketing strategy, she was paying for products she didn't need yet.
She had an email service provider that's for businesses with 10,000+ people on their email list. She had under 100. She was spending hundreds a month on an email tool that her business wasn't ready for and couldn't fully utilize. She could have easily been using MailChimp for free rather than spending $200+ each month for the program she had.
Unfortunately, she'd been sold something she didn't need because she had no budget set up and didn't understand what she needed for her business. She had no idea how much she should allocate to any area of her business and made decisions as she went. While she wanted (and needed) business coaching, she couldn't afford it because of expenses like this one.
I knew another gal who started a business that looked very successful from the outside. She had hundreds of paying students and successful online courses. Her business was doing over $100,000 in revenue, yet she hadn't earned ONE PENNY herself.
She was spending so much money on ads to get students into her courses that by the time she paid the bills, there was nothing left to pay herself. She was working crazy hours and had no income. She closed her business and looked for a job because she couldn't make it work. She was missing a budget and a minimum ROI (return on investment) for her ad spend.
When we don't set a budget and allocate funds to different areas of our businesses, we can face devastating results like these two women did. It's soul-crushing to work hard on something, give it your all, and not be able to make it work. In both of these cases, had the expenses been in line with the revenue, they would have likely survived.
How can you avoid this type of situation? Read Profit First. Understand your business's profit, revenue, and expenses. Don't hide from the numbers out of fear. Don't allow yourself to say, "I'm not good at the numbers." Learn them, understand what they mean, and follow the book's guidelines.
Numbers are not my favorite thing by any means. I hated my accounting and finance courses in grad school. I don't know if I would have gotten through them without help (a lot of help in some classes), but I know my numbers for my business thanks to Profit First.
The book is easy to read. It's a simple process to implement, and if you do what it teaches, you'll be profitable. You'll be able to pay yourself. You'll know if you can afford to invest in an opportunity that comes your way or not with certainty.