Know Your Numbers

I hate to burst anyone’s bubble, but following your passion does NOT always lead to revenue or, more importantly, profit.  Knowing your numbers, how to budget, and how to make realistic income projections  is the only way to assess  whether you’ve got a viable business model.

In my opinion, knowing your numbers is the single greatest skill you need in order to launch and grow a successful business.  You can have the greatest idea, the most passion, and a ready target market – but, if the numbers don’t work, it’s just doesn’t matter.  Let me expand .

Before I opened my business 20 years ago I took a course on how to write a business plan (keyword there is BEFORE).  You’ve heard me say it before, but you need a written business plan – especially the financial piece.  I had to be crystal clear on how I was going to cover my own paycheck since it was not an option for me to defer salary.  So here’s how I started:

  1. Have a personal budget.   I needed to be very clear on what my expenses were so that if I needed to adjust my salary in the beginning I could – and I did.  There were some real eye openers here – the details of which will not be part of this blog  .  I am very proud to say I have never skipped a paycheck!
  2. Take that same budget process and start an excel sheet for your projected Profit & Loss Expense side.  Do the research to be as precise as possible.  A word of advice – over estimate your expenses.  They will be more than you think they will.
  3. Once you’ve finished your expenses, work on the income side.  This is truly guesstimating, unless you’ve got signed contracts.  Another word of advice – under estimate your income.  Decision making takes longer than we think, it can take time to onboard, get paid, etc.   Be conservative.
  4. Work on your Balance Sheet items – what assets will you need to run the business?  Equipment, furniture, website design, attorney fees, accounting fees and so on.  You will need to raise enough capital to cover these expenses and have a debt repayment schedule on your cash flow.

In truth – these are extremely elementary principles.   Here’s the reality – you need to “think in Excel” and if that’s not a skill you possess – find it, hire it, outsource it.  Running a business is truly all about the numbers.  Your passion must translate to profit.

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Comments

  1. This is an excellent article and great advice. Can I share with my e-newsletter readers?

  2. Donna, I agree that someone starting and running a business has to know their numbers.

    Even if they use someone else to help put together the spreadsheet versions of their budgets and financial projections, they still need to own the numbers. This starts with the fact that any underlying assumptions have to be ones that they are comfortable with – because the “numbers” should be driven from these assumptions (and anyone ‘worth their salt’ who is helping with the spreadsheets should make sure the entrepreneur is driving the definition of the numbers).

    Beyond budgets and projections, even if you have a good “spreadsheet jockey” and a brilliant bookkeeper, you still need to be able to read AND UNDERSTAND what an “income statement”, “cash flow statement” and “balance sheet” tell you about the financial health of your business.

    Occasionally I talk to a would-be entrepreneur who says “oh! I don’t do numbers”. I used to be polite and tell them they should have someone on their team who does; but these days I tell them there are some financial basics they need to learn or they might as well not try to start a business.

    John H.
    Think Plan Execute
    Bringing Clarity, Structure and Results to Startups and Small Businesses

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