Budget Mechanisms – Keeping costs down and quality up.
“Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1.” – Warren Buffett
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My friend, you are in business to make the money you need to turn your dreams into realities. Thus, if you can’t balance your business budget you are going to be in trouble. Although it might seem basic, you need to mentally marinate on Warren Buffett’s investing rules, “Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1.” You must keep this thought firmly implanted in the forefront of your brain as you grow your business. After having spent many years reading about, and working with hundreds of businesses I have determined that there are really only “5 Moves” for business budgeting that work consistently. It’s true, Michael Jordan had countless “moves,” that made him famous as a basketball player, but at the end of the day he also only really had “5 Moves” that made him famous. Michael could “slam dunk.” Michael could do the “fade away mid-range jump shot.” Michael could do the “cross-over dribble.” Michael could shoot the “three-pointer” when he needed to. And Michael could knock down this “free throws” when you fouled him. My friend, don’t read 7 business books on budgeting. Just master these moves and you will be ahead the game, and your budgeting problems will be solved.
Move #1: Use Variable Based Pay On Every Aspect Of Your Business If Possible
Pay everyone based on a percentage of the revenue that comes into the business. Share the pain and share the gain with your people. If your sales are down then everyone’s pay should be down. This form of payment forces everyone to care about the overall health of the company. It forces people in different departments to have conversations that sound like, “Hey Mary. Why can’t you sales guys sell anything? We really need to go those numbers higher for everybody. Is there anything I can do to help?” If you don’t have this type of payment system in place, you will hear conversations like, “Hey Mary. I don’t work in sales, so quit trying to bring me into your mess. That area is not my job!’
Move #2: Keep As Much Cash On Hand As Possible
Cash is king. Although you can borrow against your receivables, cash is king. Although, you might have a great looking spread sheet because your fancy “accrual basis accounting system,” if you don’t have cash the game is over. Do everything in your power to only spend money when you absolutely have to. To not get seduced into buying the latest “I-Pad” because a lazy person on your staff thinks it is cool. Don’t be seduced into buying more “pens and paper” every week because the “creative people” think it would be nice. Only buy things that will help you make more money.
If you are like most entrepreneurs, you are going to have all of your savings, and most of your time and energy invested into your business. The last thing you want to do is to get stuck with bills to pay and no money in the bank. You must be beyond vigilant about watching your money. You must be a “maniac of money management”. Be intense about managing your money and when possible be the one who personally writes the majority of checks. Something special happens when you are the one writing the checks. Generally (as the owner / entrepreneur) will find yourself asking profound questions like, “do we really need to buy this?” When you delegate the checking writing too early, you run the risk of someone saying, “well it’s not my money, I’m just the one paying the bills.”
Move #3: Each Month Monitor Your Bank Statements, And Watch them like a Hawk
I realize that hawks don’t generally watch bank statements, but you get the point. Each month you must look at the money that came in and the money that went out. If the money that came in is less than the money that went out, you have a problem. Don’t bury your head in receipts trying to find “the one thing that is really killing us.” Look at your bank statement, to see if you are trending up or trending downward in the bank account. Once you know where you are going you can then refer to your “costing sheet” we discussed earlier. You will need to make sure that everything you are buying for your business is being accounting for on your costing sheet. If new costs are added to your business there had better be new revenue coming into offset these expenses.
Move #4: Live Cheap
When you start your business, you must realize that once you run out of cash, the game is over for you and your business. You must constantly check and double check to make sure that you are keeping your costs low. I love entrepreneurship. I love the possibilities, the success and the challenges, but I would be doing you a disservice if I did not dwell on the importance of living cheap when you are starting or growing a business. You can’t live in the HUGE house and drive the ULTRA NICE car while traveling to the BEST vacation spots until your business is booming. You don’t have to look like you are homeless, but you are going to have to be wise and frugal with your money. When my wife and I were first married, we lived without air conditioning for that first hot and steamy year of marriage. We literally had to choose between air conditioning and advertising for our young business. We chose to advertise. Once the money started to come in we again had to choose between nice cars or new equipment for the business. I think no one really explains this concept better than Dave Ramsey (the personal finance guru who has helped millions). When Dave said, “If you will live like no one else, later you can live like no one else” I think he hit it on the head. My friend, what are willing to live without for the short term so that you can make BIG money in the long-term?
Move #5: Avoid Business Models That Pay You Later
Business models that involve paying you later are not good. I used to own a Party Rental business and I have some worked with some clients that own staffing businesses and construction businesses and in all three of businesses models where “the client will pay you within 30 to 60 days of invoicing” they had major problems. Finding potential clients, marketing to them, selling them something and then delivering on your promises is hard enough. I can’t stand business models that require you and I to go and hunt down the “receivables” after we have already rendered service. In my opinion, doing this is stupid. I’m sure that there are people out there that enjoy hunting down their money after they have already rendered service but I am not one of them. If you are going to spend your money hunting down money that is owed, I recommend that you just set up a debt collection service instead, it’s more lucrative and you don’t have to mess with the marketing, selling and service delivering party.
In all sincerity the debt-collection business can be a profitable because very few people can do it, enjoy doing it, or are good at doing it. My friend, guard your time and guard your money. Don’t set up a business model that requires you to spend 50% of your time drumming up new business and 50% of your time collecting the balance owed to you.