It should seem simple and straightforward that when you're building a business, you want to ensure that you make money, but unfortunately, it doesn't always happen as you'd hope. Today, I want to talk about steps you can take to protect yourself and ensure that you make money in your business.
I met a woman a few years back who had a business that looked successful from the outside. She had thousands of potential customers on her email list and Facebook followers. Things looked great from the outside. Her products were selling, and her revenue was high. From an outside perspective, the business seemed very successful, but when she shared more details, you quickly saw that there were issues behind the scenes.
The business revenue was over $100,000, but the expenses were so high that she hadn't taken a single penny in income for herself. Yeah, can you imagine? She built a business with hundreds of customers but no salary for herself. No one wants to face that situation. I remember the day she confided in me. She felt broken. She felt like a failure. She was afraid she would have to go back to the corporate world because she couldn't figure out what was wrong.
As we went through her numbers, I could see where the issue was. The revenue was good. It was strong. The business was earning anywhere from $600- $1,000 a day from its digital products. They sold every day. The issue was the revenue coming in didn't meet the expenses going out.
They were using Facebook and Instagram ads to build their sales and spending around $600 a day in ads. At worst, that's a 1 to 1 return on every dollar spent. At best, it's $1.66 return on every dollar invested in ads. It's not bad, but it's not good either. It's positive cash flow, and if everyone were paying in full, they would have made a little money most days.
The issue is that people were buying on a payment plan, and the payment plan was too low to sustain the ad spend. The payment plan was $20 per month for 12 months. Her business could potentially spend $600 on ads in a day but only bring in $100 in revenue. She couldn't pay herself or sustain her business because of the difference in income and expenses.
Sadly, in the end, she closed her business and returned to the corporate world because she couldn't solve the issue.
Why do I share this cautionary tale? Because I hope it helps others understand why knowing your numbers is so important to your business. You need to set budgets and understand the ROI for your marketing efforts. You need to make sure you're spending less than you're bringing in, or you won't be able to pay yourself either. You don't want to end up with bills you can't pay. That's a horrible feeling and the fastest way to closing or risking your financial security to keep a business afloat.
How do you protect yourself and ensure you earn a living from your business? I recommend taking a cautious approach and growing at a pace that your business can sustain. Set a budget for all of your expenses and follow that budget.
One of my favorite books for entrepreneurs is Profit First. It's a simple, easy to follow financial system for non-accountants. I've used the Profit First model since my first few months in business, and it's allowed me to grow the business and pay myself regularly. Learn more about Profit First and why I think it's such a good read for my clients and students and then get a copy for yourself. You won't regret the purchase. Then work on establishing budgets so that you know you're spending is in line with your income so that you can grow the business and pay yourself. No one wants to feel that all of their hard work went to waste because they spent too much money in one area that they couldn't survive. Learn how much to budget for your marketing here. Take the time to understand your numbers so that you don't build a business that isn't sustainable. That's a heartbreaking situation for any entrepreneur.