Episode Summary – Your Attitude to Money and Failure for Business Success

Your attitude to money in business can bring failure or success. Episode 17 of the Should I Own A Business Podcast is called A Money Mindset For Success. Successful business owners often share a attitude to money that has nothing to do with bookkeeping or accountancy.

Whether you’re thinking of starting or owning a business, then obviously, understanding money is crucial. We can assure you that many people who are new to business make some common mistakes that you need to avoid. 

These mistakes can result in some hard lessons and stress, which we think is unnecessary if you get your attitude to money right before you start.

The Should I Own A Business Podcast (SIOAB) is not about teaching you bookkeeping or accountancy. We will, however, highlight some common money issues that you can avoid by having a money mindset that can significantly improve your chances of success.

Links and resources

Related blog – How To Evaluate Your Business Idea in 3 Steps

Related episode -You-360 “what do I really want?”

Related episode – Fundamental 4

Related article- Reverse Goal Setting

17: Your Attitude to Money and Failure

Your attitude to money is a crucial ingredient that will help your business to grow and avoid failure.

Being prepared to make sacrifices and knowing how to use your money wisely to get your business thriving is crucial.

This is what we call a money mindset for success.

What is your attitude to money in the risk and reward relationship?

Business success is never guaranteed, and therefore, there is always a risk versus reward equation. Starting or owning a business is a risk, with the potential rewards coming through financial success. The converse is also true, as a failed business can destroy your wealth and even land you in debt.

In general, we expect financial rewards to be higher for investments that carry a greater risk than others with comparatively less risk like popping your money in a Bank. I’m sure you’d agree that starting or buying a business is a far riskier proposition than putting your money in a Bank.

So, it follows from there, as a first step, you need to consider your attitude to that risk when you are thinking of owning a business. 

Ask yourself these questions.

· How much money am I prepared to invest in my business idea, and how would I feel if my business failed and I lost it all?

· How much time, energy, and stress am I willing to invest?

You need to work out how much money you are prepared to invest and from where will it come.

Your ambition and aspirations for your business

The next item to explore is your ambition and the aspirations you have for your new enterprise.

If you haven’t already. Go and have a listen to Episode 3 Understanding Your Motivation, and you’ll discover that many people start businesses for reasons other than financial reward. Use the free resources to explore your motivation to define your ambition and aspirations at the outset.

If your motivation is to generate significant wealth, your attitude to money and approach will be different to someone who’s looking to boost their income through operating a side hustle.

Obviously, being a self-employed sub-contractor to another business demands a different skill set compared to operating your own business where you are in control of building your brand, employing other people, and finding new customers.

Likewise, buying a franchise requires a very different mindset to owning an independent business. A franchise must abide by a franchise agreement that describes how you must conduct your business. Franchise fees and other financial obligations are also payable even if your franchise doesn’t perform well.

Is your new business doomed to struggle?

Some businesses are doomed to struggle, so it’s essential to understand that not all companies have the potential to become valuable.

Many people start businesses that will struggle, no matter how hard they work. They may invest time, money, and emotional energy in ventures that, at best, will be the equivalent of a job. Improving your business knowledge can avoid this situation.

One typical reason why some businesses are doomed to struggle is that they don’t have anything special to offer in a crowded or noisy world, so they just show up and compete.

In Episode 14 How to Evaluate Your Business Idea as we give you a 3-step process to use.

We also explain the role that business planning can play and the mindset you need about business planning, not the mechanics of writing one.

A good business plan will help you to work out your cash flow forecast. See your business plan as a ‘friend” that can help you predict future cash needs. Learning how to do business planning and cash control is an integral part of a attitude to money.

Can your business meet your ambition and aspirations?

It is crucial to understand whether your business idea is capable of meeting your ambition and aspirations to avoid disappointment and stress in the future.

To do this, you must understand what you want, and only you can answer this. Episode 2 You-360 degree “what do I really want” can help you work this out. There is a free download in the show notes to help you.

Pouring your money or heart and soul into a venture that cannot give you what you want, can be soul-destroying.

Building a business to sell as a wealth creation strategy demands knowledge, a considerable commitment, and a strict money mindset of its own.

The right business knowledge, preparation, and attitude to money will give you the best chance of success, whatever you choose.

When it comes to your attitude about money here are 

11 Tips for your attitude to money 

1 Your Duality (you and your business are different)

Get help from your legal adviser or Accountant to determine the best business legal structure for your circumstances and your business early on.

Your choice will depend upon the country you are in, the structures available, the tax and liability laws that apply.

Getting advice on the best structure for you is very important, and it also determines your legal responsibilities and the legal responsibilities of your business.

Whichever legal structure you choose, embrace the concept of your business and you being “entities” and adopt a mindset around your duality. See you and your business entity as separate.

Avoid blurring the edges between you and your business.

Hear about some differences between an Employee vs. Owner Mindset in Episode 9

2 Segregation of Business Bank Account 

Recognize the boundaries between you and your business to make life much more straightforward.

Keep your personal and business finances separate. 

Open different bank accounts and credit cards, for example. Avoid inadvertently spending money that is needed to meet your business liabilities.

Don’t pay personal expenses directly from your business account.

Do these simple things, and you are ahead in the game already.

Xero, for example, enables you to link a credit card. 

3 Your usual money mindset

What is your norma attitude to money? Are you good at planning and saving-or are you always being surprised by overspending on your credit card statements?

Honestly appraise your money management capability before starting or buying a business.

Listen to Episode 7 The Fundamental 4 as it gives you insight into the importance of money management and other great tips.

Work out your personal or home budget accurately. There are some excellent online planners for this. ASIC’s Money Smart planner is a simple place to start. This planner is handy even if your not in Australia! Other alternatives in the USA can be found on consumer.gov or mymoney.gov. There will be several great options wherever you happen to be around the world. 

Do a household budget that lists out all of your expenses and makes some allowance for unexpected costs.

4 Need and want are not the same

Assess what you need in your home budget as opposed to just what you are used to spending. Be brutal.

Do not confuse “need” with “want” just because you have got used to a certain standard of living.

Get real about starting or buying a business and the sacrifices that you might need to make if things don’t go plan.

Budgeting will prove invaluable when you come to assess your business idea and understand the cash flow you need. It will also help you to understand if owning a business is for you.

Highly motivated and driven individuals live on what they truly “need” to get their business up and running before they draw an income from it.

Be prepared to sacrifice lifestyle, in the short-to-medium term to enable your business to succeed.

Have a realistic expectation of what you can draw from your business. Get real and embrace a money mindset for success right now.

5 Don’t be a cash bandit!

I could tell you some horror stories about this very subject. Stripping cash out your business to pay for personal living costs can starve it of money when it’s needed most. Taking too much cash out too soon stops business growth. 

See budget preparation as a good test of your money mindset. If you find the thought of slogging through your finances and bills to get an accurate weekly, monthly, and annual budget too hard, then perhaps view that as a bit of a cautionary tale.

How do you expect to build a business that will depend on creating budgets and plans if you can’t budget and manage yourself?

This preparation is a crucial step in avoiding a financial problem, so do it. Avoid this at your peril.

Check out Episode 7 The Fundamental 4 as we explain why this is so important.

In your home budget, list ALL of your obligations such as loans, weddings, holidays, cars, hobbies, school fees, etc. The last thing you need is a big bill that you forgot to include!

Identify the resources that you have available to fund your business, e.g., savings or investments. Decide how much you are willing to invest in the business and the consequences if you lose the money you put in.

6 How much and how quickly

Once you have had a thorough re-evaluation of your household budget and financial obligations, you have an excellent foundation. You can calculate how much money your business has to provide, along with how quickly it needs to provide it.

Produce your business plan budget so you can assess how well the business will be able to meet your personal financial needs. Work out how quickly your business needs to grow to do this.

Ask yourself if your business plan is realistic?

If the business plan shows it cannot provide the income or cannot provide it quickly enough, stop and re-think. Revise the budget to make it realistic, or, revise your expectations about how much cash you can draw from the business. Do not just manipulate the budget to give the answer you want, for example, by using unrealistically high sales figures.

Running out of cash is a major cause of business failure, and therefore careful cash planning is time and effort well spent. A money mindset for success must have a strong focus on cash flow.

7 When our bank balance lies

One area that frequently trips new business owners is them not knowing what their cash flow is and will be. This means they tend to overspend money and not have enough when bills come in.

When customers pay your invoices, the cash in your bank account increases, and this can be a false sense of security. A simple money mindset is to accept that the majority of it is not yours!

For example, if an established trading business has an annual profit margin of 10%, that means, on average, 90% of the cash flow leaves the business! It is not yours! 

New businesses as they need cash to grow and so the amount that leaves the business might be higher.

Your business will have future bills that have to be paid (liabilities) at a date in the future.

You should know what all your liabilities are, how much they are for, and when they are due.

Keeping track of this is called managing your cash flow. Cash flows into a business and then flows back out again to pay your liabilities.

You must always maintain sufficient funds to pay your liabilities when they are due, which is sometimes called being solvent.

To help manage your cash flow, you can keep separate accounts or “buckets” allocated for different items.

A simple way that can help is to set up a separate account(s) perhaps to tax bills or other periodic bills and regularly transfer into these accounts. For example, when a customer pays you, immediately transfer the sales tax amount (GST or VAT in some countries) into a separate account. This means that when a quarterly payment is due, you already have the amount available.

You can create other buckets for things like payroll, rent, phones, etc. Using this technique helps to budget and also applies the out of sight, out of mind tactic.

It’s easy to spend money that is needed to pay for a future bill and then run out of cash. Avoid this is a common trap that is avoided by some knowledge and simple discipline.

Running out of cash is a major cause of business failures.

8 Manage relationship triggers

Avoid stressing your personal relationships, which we discuss highlight in Episode 2 How starting a business can affect your family and friends.

One of the typical triggers for friction in a relationship is often around lack of money. Businesses can be very demanding, and the choice between the needs of your business and the needs of your family or partner can be a very delicate balance. Get that wrong, and the price could be very high.

Involve your partner if you have one when you are working out your home budget and the business risk. Having a partner that understands your budget assumptions and commits to it can help avoid friction later.

Share your money mindset with your partner as they will know how you think, which can help avoid unpleasant surprises.

9 You’re a tax collector too

Be conscious that the money in your account is not just for you.

Suck it up because tax collection is part of your job!

Your business may have to collect a sales tax on your invoices, such as GST or VAT. Periodically (usually quarterly), a calculation is made between the tax or your sales and your purchases, to calculate what you must pay to your tax authority. The of course, if you are fortunate enough to generate a profit from your business efforts there will usually be some form of income tax to pay. Provisioning for this is also really important.

If that wasn’t enough, If you have employees and depending upon which country you are in, you may also have pay other employee costs. These could be, for example, pension payments, medical levies, or welfare-related taxes. 

So, the overriding thing to understand is that a proportion of the cash in your bank account is for the tax authority, so it’s not your money to keep. 

Using separate account buckets for these types of payments can help you avoid a cash flow issue when they become payable.

Consequently, when you have to make payments, you will have the funds available.

10 Profit & cash are not the same

Mention cash flow to most new business owners and their eyes glaze over with boredom.

When they experience a severe cash “crunch,” suddenly, their boredom turns to fear.

“Ignoring cash flow is simply perilous to your business.”

The lack of cash flow is a significant constraint on business growth, not to mention one of the top killers of businesses.

Ignoring cash flow won’t help – understanding, and managing it will.

The concept of profit seems natural for many of us to grasp as it’s the surplus left over after we pay for costs.

Profit, however, it is only an estimation that appears in your accounting profit and loss statement or job costing system, so in effect, it’s not real.

If you think it’s real, try buying a latte with it. You will quickly find out that the Barista is only interested in your cash flow and not your profitability!

Consider cash as money in physical form that’s available to spend.

Cash flow seems a harder concept to grasp, and yet it is a simple calculation that makes it easy to predict. Cash flow changes as money flows into and out of your business.

Too many owners don’t appreciate the relationship between their profit and cash flow, and they emphasize profitability.

Focus on improving your cash flow and reducing your working capital (the cash needed to run the business). If you don’t, you may require bigger overdrafts or shareholders tipping in more working capital. Working capital bloat is a waste of cash that could be used to fund growth, not inefficiency.

“Ignore cash flow, and your profitable business can steadily go broke-its like driving with your eyes closed.”

Do not just blame slow-paying customers as they are only one cause.

Plan how your business will grow, as this generally requires extra cash. Know the role cash flow plays in growth and do not just focus on increasing sales and profitability.

As we discussed in Episode 11 How To Choose Your Support Team, your Accountant will be a great resource in helping you to plan your cash flows so make sure you talk with them when you are looking to plan your cash flows. They will likely introduce you to a report called the “statement of cash flows” which can be an important one to learn about and keep a close eye on. 

11 Cost and price confusion

These two often get confused by people who are new to owning a business.

Cost is the cost to your business of producing your product or service.

The price is the selling price that a customer pays you for it, which should include a healthy profit margin.

Working these two out can be tricky if you are new in business. Do not ignore this critical part of your money mindset.

Many business owners wrongly assume that there is a fixed relationship between these two – some kind of formula.

The only link, in reality, is your pricing policy.

If you set prices by adding a mark-up or margin to your costs, then there is a formula that you need to choose.

If you set prices by a value pricing method, that there is no relationship between the cost and price but a connection between the price you charge and the value to give to your customer.

Many factors come into play when setting prices, such as the industry you are in, your brand positioning, and the degree of competition.

Price setting is often more of an art than a science. 

Avoid the market price trap.

Price setting is a very misunderstood art, but we’d suggest you avoid taking the easy way out that many business owners take by simply following the market price.

While you must be competitive against your competitors, you must also be profitable. Selling below your costs will send you broke quickly.

Owners frequently struggle with setting selling prices because they don’t understand their actual costs. It’s tempting to use a simple formula to set prices, but it’s vital you know what all your costs are and how much profit margin you can add.

Some costs link directly to what you produce and are called direct or variable.

Other costs are indirectly linked, as they are there all the time, irrespective of what you sell. The latter are also called fixed costs or overheads. Examples of overheads are rent, insurances, phones, etc.

If you cannot work out how to calculate your product or service costs and what profit margin to aim for, get help to do this. Your Accountant will be able to help you. Assuming you are making money is not smart-knowing how much you make is.

Calculate your profit margin for every product or service that offer. If you sell products at prices below the combination of your fixed and variable costs, you will, sooner or later, go broke.  

Your attitude to money summary 

Adopting a money mindset for success is about understanding what will make the difference to your business growth and giving it a priority. Proper planning and some sacrifices are inevitable.

Next Episode

In our next episode, we are going to talk about “turning your hobby into a business”. 

Disclaimer

The information contained in this podcast is general and does not take into account your situation. The content does not constitute business, legal or financial advice and should not be used as such. You should consider whether the information is appropriate to your needs, and where applicable, seek professional advice from a business adviser, financial adviser or lawyer in your jurisdiction. To find out more, please go to www.ShouldIOwnABusiness.com.