The super entrepreneur you follow on Instagram just posted his new video outfit. Your favorite Facebook group is crazy about ads. And your best "business buddies" just threw out a huge inventory order.
So should you grab your new video equipment right away, brainstorm advertising texts or quickly order more inventory? We don't want to be spoilsports, but the answer is quite clear: no! At least not so haphazardly.
Whether you're excited about investing in your business or you're dreading getting financing, please do your due diligence beforehand so you can make the right decision about your business.
There are three key things to consider when deciding whether to invest more money in your business to grow and scale.
You need to be clear about this before making your investment decision:
- your business finances
- your personal finances
- your goals
Once you've examined these three points, you can better decide how much to invest in your business.
Understand your business finances
- How much you can invest with a clear conscience
- What a solid forecast of your fiscal year looks like
- What your cash flow looks like in general
You might think you're doing your auditor's job here, but the fact is, your accountant may be a trusted advisor or even a confidante, but she's not your chief financial officer. Ultimately, it is your responsibility to make the right financial decisions for your business.
Ultimately, it is your responsibility to make the right financial decisions for your business.
Advice from accountants and financial planners is essential to finding a solid course, but whether you want to pause at a certain point or jump in is a decision you have to make - in a small business, you remain the decision maker.
How much can you invest?
“ For the first three to four months, I didn’t pay myself a salary from the company treasury, but invested every penny back in advertising and packaging design in order to grow as quickly as possible. After a few months of tweaking our ads to get better returns, we were making our income at a third of the price—and in turn, tripled our advertising budget for the best-performing ads. We did incredibly well with that. ”
" If I had paid myself a salary to start with, we wouldn't have been able to learn as much and put as much money into the ads that worked. ”
Not getting a salary from the company isn't for everyone, but Steven makes a good case for the benefits. The money you invest in your business has to come from somewhere .
The total turnover of your company is divided into four categories:
- Compensation for business owners
- operating cost
- Steer
- Profit
How much of your sales goes into each category depends on your industry and size. Michalowicz presents some easy-to-follow formulas in the book. Here is an example with realistic numbers:
Let's say your business brings in $2,000 in sales per month—that's your total sales. If you follow the Profit-First plan, you assign the following sums to each of the four categories ( not template, but adapted to your business ):
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Compensation for the business owner: 40%
-
Operating costs: 40%
-
Taxes: 15%
-
Profit: 5%
With that, your monthly account balance would look like this:
-
Compensation for the business owner: 800 euros (to be paid to yourself)
-
Operating costs: 800 euros (to cover expenses)
-
Taxes: 300 euros (to pay taxes)
-
Profit: 100 euros (to be booked as profit)
Exactly how much you allocate to each rubric is flexible and depends on the realities of your business. No matter how much you earn or what percentage allocations you decide on, in any case you have a very clear overview at hand of where your cash is and where you can find money if you want to invest it.
In the example above, if your operating expenses are just enough to cover the cost of goods sold and your monthly expenses, you can't deduct money for business investments from this category. That means you'll either have to reduce your own compensation or not make a profit from your business—both are viable approaches, decide which one is right for you.You alone can decide which solution is right for you.
Only your tax reserves are untouchable, you don't want to come up empty-handed when filing taxes.
What is your forecast for the year?
Maybe your business is new or growing very quickly or is subject to seasonal fluctuations. If this applies to you, a monthly overview of your business alone may not provide enough information to make reliable investment decisions.
How is your cash flow?
It's not always taboo to spend money you don't have - there are small loans and investors for that. In any case, you should know how much cash you currently have available, how and when you want to spend it, and where possible problems could arise.
Whether you're planning to use a loan or splitting up your monthly operating budget, you need to know your cash flow in detail before making any major investment decisions. Make sure you don't suddenly find yourself short of money to pay for your next inventory restocking just because you ran a Facebook ad campaign too generously.
Understand your personal finances
You might be thinking, "Wait a minute, this is about my business, not my personal finances?"
That's right, but your business is there to make money, and you certainly rely on some of that for a living. Even if you don't depend on business earnings for a living, you should know these personal metrics before making any big decisions about how your sales compare to your overall business.
Is your business your main source of income?
If your answer is no and you have other sources of income, you can arrange your salary a little more flexibly. That's one of the perks of still having a full-time job supporting your side business : you can probably afford to take a lower "salary" from your business earnings and invest the money freed up in new growth initiatives.
If your company is your main source of income, you still have leeway. You just need to be more mindful of your personal finances so you can make healthy choices for both yourself and your business .
How to give yourself a reasonable salary
Unlike in a traditional employment relationship, as an entrepreneur you are both the payer and the recipient. How much you set aside for the owner's allowance is up to you. Either way, the decision affects how much money is left for reinvesting in your business.
So please do not skip this step and examine your private finances. In turn, if you know how much you need to live on, you don't need to set aside more for your owner's allowance than you need to, and if you can significantly lower your living expenses, you can find even more free investment funds.
This is the approach taken by Succuterra's Jay Yi and Lauren McPherson at the intersection of their personal and business finances .
“ When we started our e-commerce business we were incredibly frugal and cautious about spending money because everything was so new. It's scary to think that you could lose money -- especially if you don't have much like we do. We only pay ourselves what we need to fund our lifestyle. Anything beyond that goes straight back into the scaling of our business. ”
This is how you can find out how much money your lifestyle is costing you.
Use a budgeting app like Mint . If you link them to your bank account and credit cards, you can see how much you really spend on which items.
Just look through your bank statements for the last few months. Exciting, isn't it? It's still the best way to get an idea of your output patterns. You can do that right now and don't have to wait long to use this helpful data.
Design a monthly spending plan that makes sense to you. Perhaps you can imagine radical cuts such as B. Cut your restaurant visits. If that seems too radical, admit it to yourself honestly and only take on what you can implement.
If you have an insight into your monthly private expenses that allows you to maintain your lifestyle, you can calculate your salary on this basis.
Don't forget unforeseen or irregular payments (e.g. annual contributions) as well as emergencies. Most financial advisors recommend that entrepreneurs have three to six months to bridge the gap in case of an emergency.
The bottom line is that your financial decisions depend on your priorities, and only you can set them. Once you understand your personal and business finances, you can make more confident decisions about how to use your money to achieve your goals. And then it's really fun.Understand your goals
Now that you have a solid base of numbers for your business, it's time to set your motivation, i.e. set your goals.
Once you're ready to invest, the next big step is determining where you want the money to go. Want to invest more in your inventory? Or that awesome new camera to take better photos? And maybe you want to work with a Shopify expert to upgrade your store.
For Succuterra, the big decision was to venture into the retail space.
“ We started on the back burner, shipped from our house and brought packages to the post office ourselves. But as sales grew, we knew we had to scale up. One of the biggest financial decisions we've had to make (if you can even call it a 'deciding') was to stop shipping from home and open a shop. That was a giant step for us – and quite scary. But there was almost no other option. We both worked full-time at the time and couldn't keep it up like this (i.e. work all day and then process orders from home in the evening). ”
Whatever your goals, a few key criteria always help to go from mere idea to actual investment.
What is your hypothesis?
Ideally, any business investment should start with a clear hypothesis. It may well be “just” a feeling, but you should at least see a connection between your action and the resulting business value. If your proposed investment isn't directly tied to sales, be sure you have a good reason.
Do you sell e.g. B. A complex product whose educational content offers your customers added value (like selling camera equipment with hands-on photography courses for your customers)? Or do you sell luxury cosmetics and are you convinced that influencers will open up the market for you?
In any case, you should always think of the business first and link any activity to the value for your business. Then your hypothesis is already better than any vague assumption or haphazard copying of well-established approaches.What are the key metrics?
We can certainly agree that you want to see a result for your spending. What part of your business do you want your investment to grow, and what numbers do you use to track that? Do you need a specific Google Analytics report or should you monitor how your promotional emails are performing ? Whatever the case, you need to know your Key Performance Indicators (KPIs) from the start and compare them to your starting dates before investing.
Is your online shop not yet generating the desired sales? We will show you how to use SEO in the online shop !
When is it time for a re-evaluation?
Every decision can make you nervous, especially when it comes to money. If you're funding in Facebook ads right now, you may be missing out on other business investments. You probably have to ignore dozens of tantalizing odds in order to fully focus on your best option.
To stay on track, you can set goals based on your key metrics and schedule a decision review. That's exactly how Jay and Lauren from Succuterra did it .
“ While we don't cap our ad spend, we definitely set specific ad spend/return on investment goals. Our goal is a minimum return of 3:1, but that usually fluctuates between 3:1 and 5:1. ”
If the ROI falls below 3:1—that is, if you're not making $3 for every $1 of ad spend—that would be the time to reevaluate your ad spend .
Is now the right time to invest?
With so many parameters going into your decision making, there is no clear answer as to when is the “right” time to invest or what is the optimal investment for your business. Your personal answer will always depend on your business and personal finances and goals.
And your investment decision is up to you.
If you're happy with your business the way it is and not interested in scaling, great. Not every business needs to grow, so don't get caught up in the widespread FOMO - "Fear of missing out".
However, if you're genuinely interested in expanding your business and have the money to do so, then you now have the tools you need to make sound decisions for the best of your business (and review them if necessary).
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