Financial Competence for Entrepreneurs, Coaches and Consultants

I want to talk to you today about financial competence for your business (or life) and what you can do about it. This is an interesting topic for me because I have a history of really sucking in this area. After being in business for almost a decade, financial stress and the ability to manage it have always been high on my ‘stressor’ list, no matter how much money I made.

I tend to be super ADHD and am continuously ‘re-investing’ into my business, buying courses and educational material with the promise of future returns. I can safely say that I am no longer ‘financially illiterate’ or ‘incompetent,’ and in this blog, I want to share with you some of the resources that have helped me. If you feel you can’t seem to get a grasp on the financial outlook of your company, or your life, I hope to give you some value that works for both so you can set yourself up for success.

Your Offer & Time

The main thing financially that kills so many people is that they sell stuff, but they have no idea how much money they actually make from the stuff they sell. They have bills, taxes, interest, cars, rent, and all sorts of fixed costs, and then a ton of variable costs that also go into delivering the thing that they sell. What’s worse is that most entrepreneurs, especially when they are just starting out, don’t even account for their own time as an ’employee’ of the company to make sure that they get paid.

I hear people talking about setting up cheap prices because ‘no one will buy,’ ‘there is too much competition,’ or ‘they just can’t afford it.’ While that might be true for some people, it’s not true for all people. I once heard it said that:

“There is no strategic advantage to being the low-cost leader.”

But there is a HUGE advantage in putting together a value-based offer where you tie your price or rates to the results that someone achieves with what you do and not the thing that you do alone. Most people quit their jobs to go into entrepreneurship and miss this one main principle, which is that running a business does not mean running a charity.

Let me break that down for you.

If you sell a thing, let’s say for $200, and it costs you $100 in costs to get the thing, you have to spend 2-3 hours educating your customer on the thing, and your customer acquisition costs were around 20% (typical), so $40, you’ve effectively earned $20/hour for the 2-3 hours but also have to deal with taxes, financial costs, credit card transactions, and all your CRM and fixed costs for the thing. ($200 – $100 = $60/3 hours = $20). You’re effectively making minimum wage or less in order to create work for yourself that you probably shouldn’t do.

What’s even worse is that in order to truly grow and scale a company, you have to be able to invest and be cash flow heavy on the FRONT END, so even if it’s a long-term continuity product at $200/month, it’s going to have a really hard time getting the initial momentum it needs to get off the ground (unless you’re willing to ‘invest’ the time upfront).

The main point here is, unless you have an offer that you can set up systems around to make a decent profit margin in the first 30 days, you’re going to have a really hard time. Or simply be prepared to invest for the ‘runway’ that you need to actually get off the ground. The main thing we need to be looking at is not cash collected, but the margin on the cash and how much PROFIT we are making.

As an entrepreneur, coach, agency owner, etc., we get to make up our prices, but there is an equation I use (which I’ll share later) to help you set your prices. I first need to set the foundation for what I learned from one of my favorite authors, MIKE MICHALOWICZ.

Introducing Profit First

This was a framework and a financial model that blew my mind when I first read the book, and I implemented it right away. I highly recommend reading the book (CLICK HERE TO GET IT ON AMAZON), but if you don’t have time, here is the gist:

You need to set up financial buckets

You first set up several bank accounts within your bank. If your bank doesn’t offer them or has fee-based accounts that are difficult to open, I use bluevine.com and it’s awesome. You have one account that all your deposits go into, and then other accounts for different things. Within Bluevine, you can even set up automated rules for the transfers. Here are what the buckets are:

• DEPOSITS Account
• OPEX – Operational Expenses
• PAYROLL – Employee Expenses
• TAXES – Estimated Taxes
• OWNERS PAY – What you’re paying yourself
• PROFIT – Profit you’re committed to taking from the company.

Once you have all these accounts set up, you decide on a percentage of the funds that come in that go to each account, and do a weekly transfer (or let the automation do it for you) so that the right amount goes into each account.

(I have one more account I call tithe because I give 10% of my top line in donations.)

It’s different for every business, and a lot of times it’s based on the amount of revenue you’re making, but here is what mine looks like:

• DEPOSITS (This is where the money comes in)
• TITHE – 10% (this is the first that comes out #firstfruits)

Then with the remaining 90%:

• OPEX – 50%
• PAYROLL – 20% (Including me)
• TAXES – 10%
• OWNERS PAY – 10%
• PROFIT – 10%

The reason payroll includes me is that I pay myself both as an employee of my company and as an owner because I do both roles. It’s really difficult to replace yourself in different business operations if you’re not already paying someone for that role. It’s a great way to always stay stuck as an employee of your own company!

Reverse Engineering the Offer

Ok, so now that I know I have these buckets, let me give you the equation to work this backward so you know what you should charge for your thing. This is where way too many people go wrong. I’d rather have fewer customers at a higher profit and more value than any customers I lose money on or only make $15/hr to serve.

Let’s say I sell a thing, and I expect to sell 100 of that thing this month.

My foundational fixed expenses each month are around $5000, and it costs me about $100 to produce that thing in materials (not including labor).

Well, now I know that my costs per thing (opex) are at $150 ($100 + $50).

What I do to set a minimum price then and make sure everyone, including Uncle Sam, gets paid is reverse engineer that.

• $150 OPEX
• $30 PAYROLL (3000/mo)
• $15 TAX (1500/mo)
• $15 OWNERS PAY (1500/mo)
• $15 PROFIT (1500/mo)

So my total minimum price is $300. But also to include the tithe.

So my minimum price is now $330.

But wait… there’s more.

Right now, I know that I’m getting most of my business from word of mouth and referrals, but I want to start running advertising and marketing (which we need to plan for from the beginning).

I always recommend increasing by another 20% to cover CAC (Customer Acquisition Costs).

So that brings us to a grand total of $396.

If I charge less than that, I’m going to have a really hard time getting off the ground.

All this goes to say that PRICING is important, and it’s where a lot of people go wrong. There is a reason companies like Spotify and Netflix still haven’t earned much cash and report losses each year. They have lots of money backing them. Do you?

Back to How I Solved My Financial Problems

So Profit First was a big eye-opener for me in my journey. Another thing that I always tell people is that it’s way easier to solve financial problems when you have more money, so one of the first big focuses is to increase or at least retain the money that you have. If you aren’t making sales, there is no amount of budgeting or accounting that will help.

But if you are, here is how to not go broke even when you are making money.

1. Mind your NO’s. If you are being asked to invest in something, buy something, or get someone to ‘build you a website,’ constantly ask yourself the question: Is this a ‘need to have’ or a ‘nice to have’? Meaning, is that the thing that will solve my problem today, or is that something I’ll need to do when I have some extra cash to spare on growth?

   An example of this is someone just starting out thinking that it’s a good idea to spend $2500 on a branding package and logo. It’s not. You don’t need to build a cool logo. Let AI do it for you fast, and your first customers won’t care. You also don’t need a major website, or SEO (right away), or any of the things that marketers will try to sell you.

   One thing I’ve noticed about marketers is that when they are a hammer, everything is a nail. If you talk to the SEO guy, of course, you need SEO. If you talk to the branding guy, of course, you need to buy his course on creating a brand. People are constantly trying to sell you stuff, and you are allowed to say no, but the even better answer is ‘not yet; it’s not part of my strategic plan at this point.’

2. Have a strategic plan. In a recent blog post, I talked about the GEOMETRIC PROGRESSION FORMULA, which is the idea that each stage of the customer journey requires a different set of skills than the one before it. Only you get to decide which dominos to knock down and what is the most important to do and when. There is nothing someone can do to the objection that ‘that will be part of my strategic plan next quarter; I need to do x, y, and z first so that what you’re talking about will work even better, and I’ll have the money to spare.’

3. Track, Track, Track. One of the biggest breakthroughs happened for me when I started a habit of logging into my bank accounts every morning to see what’s in there. Getting notifications about deposits and getting forecasting for what’s coming in and what came in last week.

   I have a weekly financial spreadsheet that I update myself to hold myself accountable, with all of my accounts and recurring expenses documented along with what days they get debited from my account. Without it, I’d be the same person I was years ago, allowing money to come in and HOPING I could make payroll and no bills came due. That’s a recipe for anxiety and frustration (and maybe some overdraft fees). Yikes.

   Set up a regular cadence to track your fixed and variable expenses, and do it yourself. You can’t outsource this.

Bonus Tip (if you can swing it)

When you’re looking at your expenses, look for things that you can save a significant amount on by paying for annual subscriptions. (Black Friday is a great time to watch for these). If you can save 50% on an annual subscription, it makes sense to put it on a credit card, even if the interest is 30%.

Conclusion

Financials tend to be something that we want to completely ignore (at least if you’re like me), and it makes sense. Especially if there isn’t a lot of money in there. But when there isn’t a lot of money there, it couldn’t be more important. As the CEO of our business, we get to wear all the hats (at least when first getting started). We are the CFO, the CEO, the CMO, the VP of sales, the sales guy, and the production guy. All the guys.

Without finances and a decent amount of cash, you’ll never be able to start to free yourself, invest in coaches or mentors, re-invest in the business, and get paid, which is kind of the point, right?