Over the past 15 years we have worked with businesses from a huge range of industries. The decision makers within these businesses also come from a vast background of financial experience and literacy, but regardless of their background or industry, there are some common factors that appear to be shared by all successful businesses. For the purpose of this article, I am defining a successful business as one where the business owner is not financially stressed, so they can focus all of their attention into building the best possible business.
Principle #1: Spend Less Than You Earn
Whilst it sounds pretty straight forward, this can become a bit more complicated in reality when payment terms vary between your customers and suppliers. Depending on your industry this varies. In most hospitality, your suppliers require payment up front and you’ll also receive immediate payment from your patrons. In retail, this requires good bookkeeping to track the actual cost of your purchases and assigning them to each sale as it is made down the track.
You should be striving for this over any period of time as long as or longer than a single pay period. It should be true over a pay period, a month, a quarter, a year, a decade — no matter how you slice it, you should be spending less than you’re earning.
Now, this is tricky to actually pull off and almost no one is perfect at it, but I will say that whenever you fall short on that principle, there’s almost always a financial problem lurking there that you can solve. It might be a problem of inadequate planning or a problem of too much impulsive spending or a problem of inadequate emergency preparation. Even if you do come across a problem, the more you do this, the better you will become at planning.
Principle #2 — Paying Down Debt is Never a Bad Idea
It is never a mistake to pay off debt. If you are unsure as to your next financial move, paying off debt is always at least a good move. It may or may not be the absolute best thing you can do, but it’s always a worthwhile choice.
When you pay off debt, you’re reducing the future interest you’ll have to pay on that debt. This has a snowball effect on improving your cashflow as it reduces your monthly obligations. When a debt is gone, you no longer have that bill coming in the mail and you have the freedom that comes with less money that you have to spend each month. This gives you options with that money, a power of choice that you didn’t have before.
Principle #3 — Try To Avoid New Debt
While paying off a debt is always a good thing, actually taking on a debt is often not a good thing. The reasons for this mirror the reasoning above.
First of all, it means that you’re saddling yourself with a new required regular bill. This means that even more of your income is tied up in required spending than before, which means that a higher level of income is required from you just to keep the bills paid. If you want to be tied to your job, the best way to do it is by pulling out the ropes of debt. Your life’s flexibility is reduced.
Second, almost all debts come with interest, which means that you’re going to be paying back more money than you borrowed. That’s not a good financial choice, as over the long run it comes down to overpaying for something.
Principle #4 — Prepare Early for Future Expenses
If your business is making a profit, then you’ll be up for income taxes in the not too distant future. If you can find the discipline to put away some funds early on, you can earn some interest and it won’t even be a stress down the track when it’s time to pay.
You know you’re going to have to replace that car in a few years. Start saving for it now so that you can just pay cash for it rather than taking on a car loan.
You know you’re going to pay for at least a part of your children’s college education. Start saving for it now so that you can just pay cash for some portion of it rather than taking out on a loan.
You know you’re going to need to pay for insurance at some point, property taxes at some point, and so on. Again, save for those things now so that they’re not even a slight concern later on.
Principle #5 — Help Your Future Self
Many adults, particularly younger adults but a surprising number of older adults, assume that they’ll just take care of some issue down the road instead of worrying about it now. My “future self” will handle retirement savings. My “future self” will handle that car repair. My “future self” will actually do some professional development.
Here’s the truth. Your “future self” is going to be you. Just older. They’re going to have less energy than you do. They’re likely to have experienced some kind of misfortune. They’re going to look back at the most wasteful moves in their life with regret.
Right now, your life is quite likely in a better state than it will be for your “future self.” Rather than adding even more burdens to your already tired future shoulders, choose to shoulder some of those burdens now when you’re young and can handle it.
Principle #6 — Get a Good Bookkeeper
(I know the title says 5) … but none of the 5 principles are possible without a good bookkeeper who keeps you informed every step of the way. A good bookkeeper gives you the confidence to have a pulse of your business. They will help you make better financial decisions wether it is prepare provisions or debt related decisions or on how to manage your expenses.
A good bookkeeper is difference between financial success and failure!
A business mentor once told me that if you have a good bookkeeper, then your business will be able to weather anything that it is faced with.
This counts in personal finances as well. I strongly encourage business leaders to get a good bookkeeper.