[av_heading heading=’#101. How to manage your finances (Ignore your bank balance!)’ tag=’h1′ link_apply=” link=’manually,http://’ link_target=” style=” size=” subheading_active=” subheading_size=’15’ margin=” padding=’10’ color=” custom_font=” custom_class=” admin_preview_bg=” av-desktop-hide=” av-medium-hide=” av-small-hide=” av-mini-hide=” av-medium-font-size-title=” av-small-font-size-title=” av-mini-font-size-title=” av-medium-font-size=” av-small-font-size=” av-mini-font-size=”][/av_heading]
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As a creator, you must understand your business’s financial position from month to month. But when the company is small, it’s easy to judge things by the monthly bank balance, just as you do with your personal accounts.
Unfortunately, that mindset won’t work when running a business, especially if you intend to grow to seven figures or more.
Don’t base your decisions on “cash in the bank.”
Your business’s bank balance isn’t an accurate representation of reality because it doesn’t show trends or changes over time. You can see how much you have this month, but what will the balance be next month? Or next year? It’s impossible to invest in growth if you don’t know where the business is heading.
It can be comforting to see a healthy balance in your own bank accounts, but for a business, cash in the bank is depreciating year on year. So $100 this year is worth only $95 next year.
Know the bigger picture in your business finances
To see the trends, you need to have management accounts or profit and loss statements to monitor the finances accurately.
P&L statements show revenue and direct costs each month. When you see that plotted out over time, you can spot the trends and begin to predict the future.
It’s a fact that the more the business grows, the more you’ll spend each month. However, management accounts show that your profit margin is also increasing. Knowing that enables you to make hiring and investment decisions with more confidence because you understand what’s happening in your business now and over time.
“When you have transparency and insight into the inner mechanics of your business it allows you to invest in new things based on those trends.”
Recommended Reading
Creators are often “accidental entrepreneurs,” growing a business as a result of having an audience. Often they haven’t been to business school to learn finance 101. So be proactive about learning financial management, especially if you intend to grow a business to seven figures or beyond. Books are an ideal place to start. Olly recommends:
“Scaling Up” by Verne Harnish
“Simple Numbers Straight Talk Big Profits” by Greg Crabtree
“The Nuclear Effect” by Scott Oldford
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