How to Combat Stress as an Entrepreneur
Being an entrepreneur is stressful. A small amount of stress can actually be a good thing as it pushes you to work harder and propel your business forward. However, too much stress can take all the joy out of entrepreneurship, harm your health and hinder your productivity. Studies show that people who suffer from prolonged stress experience a range of nasty side effects, including insomnia, low self-esteem, and frequent colds or infections. While stress is part and parcel of entrepreneurship, there are plenty of realistic ways to manage it.
1. Delegate
The first step towards reducing stress is lightening the load. Entrepreneurs often try to tackle everything themselves, which is unrealistic and only leads to burnout. To achieve long-term success as a business owner, you have to know when to delegate. Identify which tasks require your specific expertise and delegate those that your team members should handle. If you’re a sole trader, you can always outsource certain tasks to freelancers or virtual assistants. This allows you to concentrate on growing your business and helps to preserve your creativity.
2. Exercise
Adding another task to your to-do list might seem counterintuitive, but regular exercise is an incredibly effective stress buster. Richard Branson, for example, has stated that his commitment to health and fitness has played a vital role in his success.
Firstly, exercise releases endorphins which help to combat stress and fatigue. Better still, exercise improves cognitive function, strengthening your memory and sharpening your focus. This means that exercise can boost productivity, which may further reduce your stress levels. Essentially, it kicks off a positive cycle that can really make a difference in keeping stress under control.
You don’t have to run miles every day or spend hours in the gym. Even a small amount of daily exercise can be useful in managing stress. If you’re pressed for time, why not try a 15-minute HIIT session in the morning to get those endorphins flowing?
3. Meditate
Meditation has been around for thousands of years and is celebrated for its stress-busting benefits. It can be done anytime, anywhere, but it’s best to set aside a designated time slot each morning or evening so that you don’t forget to do it.
Studies have shown that daily meditation is an effective way to treat stress and anxiety. Regular meditation also helps to increase your attention span and self-awareness, which can help you become an even better entrepreneur.
4. Find a Hobby
As an entrepreneur, it’s easy to let your work consume your whole life, but you must make an effort to maintain other interests. A fun hobby is a great way to unwind. Remember that not everything you do has to make you money.
Besides, relaxation is actually essential to creativity. Performing an activity just for fun triggers a release of dopamine in the brain, a feel-good hormone that stimulates the creative part of the brain and gets those good ideas flowing. Therefore, taking up a seemingly trivial hobby not only helps to combat stress but may also benefit your business.
5. Take Regular Breaks
Many entrepreneurs are guilty of working solidly through the day, but did you know that neglecting to take breaks actually damages your productivity? If you struggle to remember when to press pause, try setting a timer on your phone to remind you to take a break every hour. Stepping outside for just five minutes can help refresh your brain and allow you to gain a new perspective.
Summary
As an entrepreneur, it’s important that you control your stress rather than allowing your stress to control you. Whilst it’s tempting to neglect breaks and devote your entire life to running your business, this is a short-sighted approach that will only lead to burnout. Effective stress management is essential for the long-term health of your business, so make sure you’re committed to keeping it under control.
How to Set Ambitious Yet Realistic Goals
Adjusting your goals and expectations to what's within your possibilities will ensure your success. Not to mention, it can help you avoid unrealistic planning frustrations.
Having reasonable goals can be a driving force behind individual, team, and company success. If you precisely determine what you're aiming at and do it early on, your efforts will have a clear direction and appear more meaningful.
However, setting goals isn't without its challenges - poor orientation, succumbing to perfectionism, and lack of motivation are among those that are quite detrimental.
That's why we've compiled a list of steps that will help you determine and set optimal goals while avoiding common pitfalls.
Step #1. Back Your Goals Up With Solid Planning
The importance of thorough planning can't be overstated.
A goal without a plan is, in essence, just an abstract idea you can't act on. That's why the first thing you should think about is exactly how you'll achieve your goal.
The most effective way to make a plan is to start with the big picture in mind and go more and more into details.
Start with a general road map - setting a certain finish line, marking every bump, and turning down the road. Then take a look at the individual stages of the journey and define the challenges you could encounter.
Keep in mind that this is a crucial step - if there are too many obstacles requiring more energy and resources than you can expend, you will do well to reconsider your main goal immediately.
Finally, once you know where you're going and how you'll get there, start preparing contingencies.
A good plan will take you a long way, but it would be wise to expect something to go sideways. Prepare to adjust your tactics accordingly.
Step #2. Be Clear and Specific
Setting goals includes envisioning a certain point in the future. However, it would be best if you didn't stop at a general, low-resolution picture.
You must define all of the details of what you want to achieve.
For instance, aiming to increase your company's sales is a low-resolution goal. It could be a good starting point, but you should consider the specifics if you want to ensure you're progressing in the right direction.
Exactly how much of an increase would you like to see in your sales? How would you want your business to change before and after you've reached that goal? Would you be willing to make sacrifices to get there, and what would that entail?
There's plenty of details to flesh out when setting your goals. All your efforts will become focused on the specific necessary tasks if you do it right, and the progress will become apparent.
Step #3. Establish Milestones
A common mistake in planning goals is that people tend to aim for the grandest achievement, disregarding the smaller but vital victories.
This approach can become draining very soon - you might be overwhelmed by how unattainable the set endpoint seems. To avoid fatigue and discouragement, make sure to have several smaller goals set as milestones.
Reaching the milestones will give you that precious sense of achievement and progress and motivate you to keep going.
Good Goals Are the Way to Success
Aiming for something you can realistically achieve and having a good plan of getting there will set you on the right path.
When you're convinced your goals are the right ones, pursue them with determination. Great results will follow.
7 Most Common Money Mistakes for Startups to Avoid
Smart financial management is essential for any business, no matter how big or small. However, it can be difficult to get things right, especially during the startup stage. Poor financial planning is one of the most common reasons startups fail, so the sooner you take ownership of your business's financial health, the better. Dealing with your finances head-on from the get-go is the best way to set yourself up for lasting success. Careful planning can help you to avoid common money mistakes and shows potential investors that you’re serious. Here are the most common financial mistakes that startups make and how to avoid them.
1. Prioritising Instinct Over Information
Whilst following your gut is generally a good principle; it’s a dangerous game to make assumptions about your finances. It’s vital that you meticulously track your revenue and expenses and closely monitor your cash flow. If a small mistake goes unnoticed for too long, it could prove very damaging for your business.
2. DIY Accounting
Managing your accounts by yourself will suffice for the initial setup of your business, but it’s wise to hire a professional accountant as early as possible. Juggling self-taught accounting with running a small business will eventually result in a backlog of errors, which can prove costly. Professional accounting services save time, money, and stress, allowing you to focus on growth. You don’t need to hire a whole team. Start by outsourcing your bookkeeping or setting up quarterly meetings with a financial consultant for help and advice.
3. Failing to Assign Project Budgets
Assigning a budget to a project prevents it from draining your finances should something go wrong. A clear budget will allow you to reassess your finances should the project require more money and make smart decisions that won’t damage your business.
4. Disorganized Files
The importance of balancing bank statements and keeping receipts in order cannot be overstated. Patchy bookkeeping can cause chaos for your business and result in a lot of trouble, not to mention wasted person-hours trying to resolve the problem. Keeping all of your receipts and cross-referencing your accounts with your bank statements is vital for transparency and future success.
5. Misunderstanding Your Target Market
For your business to be successful, you need to understand what your customers need. Knowing your target market helps you to reach them, as well as how to price your products and services appropriately. Here are some questions to consider:
- What is your market position?
- What need do you fulfill for your customers?
- How much value do your products or services provide?
- Who is your competition - and what makes you stand out?
Miscalculating prices can prove to be a grave error for a small business, but knowing your market well will help you to figure things out.
6. Hiring Quantity Over Quality
Over-hiring is an expensive mistake to make. Hiring employees is one of the most costly parts of running a business, so going overboard is a huge waste of money. It can also damage staff morale and productivity, and lay-offs further down the line will amplify the problem.
Bad hires are another threat to a small business. Hiring the wrong employee can create an imbalance within the company culture. In turn, this can negatively impact other staff and even damage your business’ reputation. Don’t rush the hiring process. Taking extra care to avoid mistakes can save a lot of trouble in the long run.
7. Miscalculating Expenses
To keep your business afloat, you need to know exactly how much cash your business burns each month. Keeping a meticulous record of your expenses allows you to understand where your money is going and how much you’ll need to survive. Underestimating your cash burn can land your business in hot water, so create a projection of your monthly expenditure and be sure to monitor it closely, making adjustments whenever necessary.
A successful business needs a strong financial foundation, so keep these mistakes in mind. No business is invincible, and it really does pay to be cautious and always stay one step ahead.
The Best Ways to Motivate Your Team
Do you have underperforming employees or collaborators? Try these methods to motivate them and boost productivity.
Not everyone’s a motivational speaker. And out of those who choose that profession, only a small percentage can truly change people’s minds.
But you don’t have to become a motivational speaker to motivate your team. You don’t even have to hire one to do it for you.
A few simple tricks can help you turn things around at the office.
#1. Show Respect
People that don’t respect you won’t work hard for you. But being a top expert in your field or a business owner isn’t always enough.
Respect is something you have to earn and reciprocate. If you treat your team members as individuals, you can earn their respect.
Acknowledge that everyone has different needs. Show respect and flexibility in your approach, and you can earn their respect in return.
Once they like you and become loyal to you or the company, they’ll want to work harder, too.
#2. Offer Feedback
Sometimes, people lack motivation for lack of knowledge. They don’t know if they should push harder because they don’t get feedback.
No feedback doesn’t always mean a job well done. So offer feedback more often to motivate your team.
#3. Celebrate Accomplishments
People crave recognition for their accomplishments. Make it a part of the company culture to acknowledge the successes.
It’s a sure way to hire up your people and get them motivated to do their best.
#4. Encourage Collaboration
Sometimes you may have to encourage your team members to work with each other. Set up collaboration projects and invite input from different departments.
Most of all, encourage social interaction to make the workplace a more pleasant environment.
#6. Merit-Based Compensations
Financial motivators are always effective, but often only to an extent. So you may want to revisit the company’s compensation structure. That is if you even have one.
It’s better to adopt a merit-based reward system that shows appreciation for the hardest workers. It will make your people more motivated and productive.
#7. Invite Competition
Over and beyond collaboration, what can motivate some people is a little friendly competition. If you can’t afford to offer financial rewards to the top performers, do something else.
Acknowledge your best team members every week or month. Put up a chart in the office that clearly illustrates who’s on top of their game.
#8. Set Clear Goals
Here’s another reason why some of your team members may not be pulling their weight:
They don’t have a clear target or goal to work towards.
The clarity of your demands is often critical, regardless of your niche.
People need to know that they have to complete a specific task by a set deadline. It’s a more powerful motivator than you might think, and it doesn’t cost a penny.
#9. Promote More from Within the Company
One of the best ways to motivate your people is to show that there’s room for growth.
You have to let your people know that they’re not slaving away in dead-end positions. And if you promote internally, it lets them know that you’re not always on the prowl for outside talent.
It can motivate your people to show their true value and exceed expectations.
It All Comes Down to Valuing Your People
The little things count when they come from a good place. Show your people that you value them, don’t just think it.
Offer feedback, respect, and incentives for your team to want to do better. Once they do, everyone benefits from it.
Four Tips for Improving Your Decision-Making Process
Making the best choice can often prove challenging. Luckily, there are ways to make your decision-making skills better.
People who can make the right decision at a moment's notice are always well-respected among their peers.
It might seem like this ability comes naturally. But in reality, it's a skill you can learn and develop.
Here are four tips about decision-making that will help you do just that.
Tip #1. Learn From Experience
Experience from previous situations comparable to the present can inform your decisions and serve as a useful guide and point of reference. That’s why in many cases, keeping a record of past crucial decisions can prove invaluable.
But you don't have to rely only on your own experiences.
When faced with a decision, especially if it's a crucial one, don't shy away from consulting other people. Those working in the same field could have useful insights and knowledge that you can leverage in your decision-making process.
Tip #2. Compare Costs and Benefits
You can apply cost-benefit analysis to most choices. It comes down to weighing the pros and cons, considering what resources to use, and understanding the outcome of your decision.
Think about the available options and imagine what it would take to act on each of them relative to what you'd achieve through those actions. Again, it would be beneficial to remain realistic when considering both positive and negative aspects.
Once you've measured the costs and benefits of your decision, the solution might become obvious, even if it's not the one you initially expected.
Tip #3. Break Down the Questions
Complicated decisions can often be broken down into smaller components that are less challenging to understand and resolve. If you can see the large picture as a set of simple, interconnected factors, you'll have an easier time reaching a decision.
Starting from the current state of matters, define the outcome of your choice as the endpoint.
Then, look at all of the points leading to that outcome. Finally, ask yourself what's the most optimal path leading from one to the other and weigh the costs and benefits of each step.
The gained insight from breaking down the questions can make your decision-making much more straightforward. You could even find a more effective way to resolve the issue at hand.
Tip #4. Prioritize
If you're facing one complex decision or a series of smaller ones that require your immediate attention, the situation can become overwhelming. However, you won't always have the luxury of taking a step back and carefully examining each question.
This is when prioritization can be of vital importance.
The essential decision you should make is which matter requires your attention the most. When you realize which issues are pressing and which can be put on hold, the situation will become more transparent, and you'll be able to direct your actions more efficiently.
Prioritizing is equally useful when it comes to a single big decision. In this case, however, you should concentrate on which outcome is the most important rather than which question needs answering first.
Weighing short-term and long-term profits is a good example of prioritizing. Faced with a choice between the two, a company will decide on the course of action based on which type of profit it prioritizes.
Improve Your Decision-Making
Making well-informed, reasonable decisions is at the core of every successful venture. Luckily, you can improve your decision-making process using the described methods and start making choices that lead to the most beneficial outcomes.
How to Use Smart Budgeting to Accelerate Business Growth
Creating a realistic budget is one of the best ways to protect your business during periods of difficulty and keep it running smoothly despite setbacks. A budget gives you more control over the financial health of your business, allowing you to manage cash flow, create spending caps and set realistic targets. The businesses that succeed are the ones that prepare and adapt when necessary, so smart budgeting is really non-negotiable. Here are five helpful budgeting tactics that you can use to help your business survive, grow and flourish.
1. Calculate Your Costs
The first step towards creating a realistic budget is calculating your expenditure. This step forms the basis for the rest of your budget, so it's essential to be as accurate as possible. Meticulous bookkeeping is enormously helpful for this, but if your business is new, you'll need to do in-depth research. If in doubt, overestimate. It pays to be cautious.
Your costs fall into two categories: fixed and variable. Fixed costs account for things like rent, which stay the same every month. Meanwhile, variable costs fluctuate along with your volume of work. Raw materials, supplies, and power usage are examples of variable costs.
You'll also have to factor in marketing, advertising, and legal expenses; these can quickly grow out of control, so it's wise to double or even triple your estimate to be on the safe side.
If possible, have your business partner or bookkeeper look over your estimation. A second pair of eyes is always helpful, and they may be able to point out things you've missed or costs you may be able to reduce.
2. Estimate Your Revenue
Estimating your revenue is notoriously difficult and requires extensive research or even professional advice. However, don't skip this step. It's worth putting time and effort into creating a realistic estimate because it allows you to plan expenses and manage cash flow. You should make both an aggressive and conservative projection. The former will boost morale within your company and motivate staff to work harder, while the latter will allow you to make safe decisions about your finances.
3. Work Out Your Gross Profit Margin
Your gross profit margin is a measure of how much money you're actually making. Therefore, it's essential to calculate this figure regularly and keep track of your progress so that you can understand whether or not your business is growing and at what rate.
To work out your gross profit margin, subtract your costs from your revenue. Then, divide this figure by your net sales to find the percentage of your margin. If this number is increasing each month, that's a great sign. If it's decreasing, it may be time to reduce your spending.
4. Plan for Cash Flow
Gross profit margin is important, but cash flow is equally vital to the health of your business. Expansion, seasonal trends, and economic conditions can all impact your cash flow. Therefore, it's essential to have an idea of how much money you'll have available to you at different points during the year so that you can plan accordingly. In addition, bear in mind that fluctuations in your sales volume will directly impact your variable expenses.
If you've been in business for a year or more, you can use past data to predict what your cash flow will look like each month. However, if your business is still in the fledgling stages, then it's time to do more research and look into trends within your particular industry. This should tell you when your high and low seasons will be and alert you to other factors that may affect your volume of sales. The advice of a financial advisor or bookkeeper is likely to come in handy here.
5. Prepare for Emergencies
Even the most successful businesses experience difficulties, particularly during economic downturns. Therefore, it pays to have a contingency fund set aside to keep your business safe should a disaster strike.
Your contingency funds might take the form of savings, at least in part, but it's also worth knowing about finance options available to you:
- Business credit cards are suitable for short-term difficulties and can help you manage cash flow when issues such as late payments arise.
- Lines of credit provide your business with a safety net for longer-term problems. They combine the on-demand convenience of a credit card with a bank loan's attractive rates and repayment style.
Summary
When done right, budgeting can accelerate the growth of your business by helping you to avoid roadblocks and potential disasters. A careful budget puts you in the driver's seat and allows you to remain in control of your finances as you work on your business.
Bear in mind that not everything will work out exactly as you expect, and it's worth taking the time to review and adjust your budget regularly. Think of your initial budget as a rough draft: necessary but not yet perfect.
Four Ways to Reduce Costs and Boost Your Profitability
Not sure why your bottom line isn’t pretty? Sometimes, overspending can hurt your profitability despite your record sales.
Profitability doesn’t only come from sales numbers. And a profitable business isn’t always the one with the most customers and the highest sales.
The sign that a business is profitable is what’s left in the account at the end of the month or the fiscal year.
It’s important to account not only for the money coming in but also the money going out. That’s why cutting costs is one of the best ways to boost profitability… assuming that you do it right.
Tip #1 – Address Material Costs
Sellers of products are most concerned with raw material costs. That’s why increasing profitability can be as simple as lowering manufacturing and or development costs.
You’d be surprised at how much this move can make your business profitable.
Tip #2 – Reduce Labour Costs
Is there something in your business that you can replace with an automation system?
Have you considered hiring a VA as opposed to an on-site assistant?
Reducing the amount of money spent on wages can also boost profitability when you draw the line on your finances. So, evaluate the daily tasks that your team members perform and look at some of your own duties as a business owner.
In today’s environment, outsourcing is one of the best ways to cut costs. It’s also one of the smarter ways to hire as you may have access to a wider pool of experts.
Properly executed, you can lower costs and maintain a high level of quality with outsourcing.
Tip #3 – Manage Expenses
Many businesses are overpaying for marketing.
For example, hotels may work with various travel agencies even though a couple of them may be bringing in the bulk of the bookings.
In that scenario, it may be a good idea to drop the non-performers.
The same principle applies to all other expenses and services. If you pay for things and they don’t end up improving your business or what you offer, these may be expenses worthy of the chopping block.
Needless to say, this would affect your bottom line directly.
Tip #4 – Know What Costs to Cut
If only cutting costs were simple, right?
Most business owners don’t know where to start. If you’re one of them, it’s ideal to start by performing an internal audit of your finances.
Identify where all the money comes and goes and decide what you can or can’t cut.
Tip #5 – Get Better Deals
Many industries work with vendors, which happens to be a great area to look at if you want to boost profitability.
You may already know that it’s possible to renegotiate vendor contracts, though it’s easy to be put on the back burner. However, getting better deals doesn’t always have to involve other vendors, as you can also leverage your relationships with existing vendors.
You can even consider changing service providers and utility contracts.
Cut Costs Smarter, Not Harder
You don’t have to make massive cuts in a single department. Even small amounts add up to significant savings if you make enough of them here and there.
These tips are particularly helpful to anyone operating a cash flow-dependent business. That said, they apply to both B2B and B2C companies looking to boost their bottom lines.
How to Spend a Marketing Budget Wisely in 2021
Marketing budgets are on the rise, and for a good reason. Research by the CMO Council found that 65% of marketers plan to increase their budgets in 2021, but how do you know which channels or tactics will work best for your business? To help answer that question, we've created a list of five tips that can help you spend your marketing budget wisely this year. Remember that it's not about what works today but rather investing in what will work tomorrow.
Marketing Budget
But before we get into the tips, you may already be wondering how much your budget should be. A good rule of thumb is to spend 2-5% of your revenue on marketing for B2B businesses and 5-10% for B2Cs.
Media Spend
Media spend is the section of your budget devoted to advertising your company’s products online through ad campaigns and pay-per-click (PPC) marketing. This includes social media sites like Facebook and Instagram and search engines such as Google or Bing.
Businesses should spend around 20-40% of their digital marketing budget on paid media channels to reach new customers. This percentage tends to be greater for B2C companies, whereas B2Bs often find that content built for unpaid social channels can offer a higher return on investment.
Unpaid Channels
Unlike pay-per-click advertising, unpaid channels are free to use. You don’t have to pay for your views and clicks. These channels include blogs, YouTube videos, and social media sites such as Facebook and LinkedIn.
However, although you do not have to pay for each click or impression on these channels, they still require some investment. For example, you may need to hire a copywriter, pay for scheduling software or enlist the help of a virtual assistant.
10%-30% of your marketing budget should be spent on talent to create content for these unpaid channels. Educating the public about your products and creating entertaining content helps attract new audiences and convert leads into paying customers. Therefore, you are likely to see a great ROI with this cost-effective form of marketing.
SEO
Small businesses with a local presence should focus on search engine optimization and localization. This is a great way to make sure that customers can find you easily, and it also helps you rank higher on the search engines. It's easy for people to find your business when your website ranks highly in Google searches— which means more potential appointments or inquiries from prospective clients going forward. You should focus between 10-30% of your marketing budget on this area, depending on the needs of your business.
Graphic Design
Companies are missing out on a huge opportunity to stand out with their marketing efforts by failing to invest in the design of creative assets for both paid and unpaid channels. You can do this fairly easily by hiring freelancers or doing it yourself using free-to-use tools like Canva, so it shouldn’t take up more than 5-10% of your marketing budget.
Customer Retention
You need to keep in contact with your customers even when spending is down. It costs far less to retain an existing customer than to acquire a new one, and they tend to spend more, too. Your best customers are those who come back again and recommend others because they trust you to deliver a high-quality service every time. When times get tough, go the extra mile to support and reassure your customers. Don’t limit your best offers to new customers, or your existing ones may feel undervalued. A few ways to reward customer loyalty include:
- Hand-written thank you notes
- Exclusive discounts
- Private sales events
- Free trials or samples of your latest offerings
Summary
Marketing will look different in 2021 and 2022. In the wake of the pandemic, the world is changing faster than ever, and business owners must learn how to adapt. To succeed in this new landscape, you need to constantly think about where your customers live online and what they do there. These shifts mean marketers have more work to do than ever before, but success can still be found through resourcefulness and creativity.
How a Bookkeeper Can Help Your Small Business to Succeed
They say that behind every good business is a great bookkeeper, and it’s true! A great bookkeeper does far more than keeping you compliant - although that certainly is an attractive benefit. Hiring a great bookkeeper is a big step towards improving the financial health of your business and can really help with planning for the future. Here’s how a bookkeeper can help your small business to succeed.
Save Time
One of the most attractive benefits of hiring a bookkeeper is the relief of not having to do it all yourself. Accounting is notoriously difficult and time-consuming. A great bookkeeper will save you many person-hours and allow you to get back to growing your small business.
A Smaller Tax Bill
A great bookkeeper won’t see you pay a penny more in tax than is strictly necessary. Many small business owners, despite their best efforts, end up missing out on tax deductions or incentives. It’s best to have a quality bookkeeper on your side who can help ensure you are tracking all available business expenses.
Accurate Records
It’s important to maintain accurate financial records to ensure that mistakes don’t compound and spiral out of control. A great bookkeeper will ensure that your records are impeccable so that you don’t end up with a tangled web of errors on your hands or worse, mistakes on your tax return that could come back to bite you.
Financial Planning and Stability
Cash flow can be very tricky to handle and it’s often difficult for business owners to get a clear picture of how much money is entering and leaving each month. A bookkeeper will help you to manage your cash flow and ensure that there’s always enough in the bank to continue operations, even when times are tough. This helps to keep your business stable and running smoothly. You’ll be able to offer both your staff and your clients a consistent and positive experience, maintain high levels of trust and loyalty with both.
Marketing
It may not seem obvious at first that a bookkeeper would be able to help with marketing, but they may in fact be able to advise you on where to spend your money and which practices aren’t generating a worthwhile return on investment. This allows you to focus on the marketing activities that truly drive the needle for your business and cut back on areas that aren’t serving you. Furthermore, cash flow analysis can help you decide when to launch a new campaign and get a clear picture of the results.
Summary
A great bookkeeper is so much more than a number cruncher - they function as a partner and guide to help you make the best possible financial decisions for your business. Whether you’re in the startup phase or looking to grow your business, hiring a quality bookkeeper is a decision you won’t regret.
Cash Flow vs Profit: What’s the Difference and Which is More Important?
It’s the age-old debate: cash flow or profit? Whilst the two are undoubtedly related, they are certainly not the same thing, and business owners must often sacrifice one at the expense of the other. In the long term, a business needs both positive cash flow and profits to continue operation, but which one should entrepreneurs be prioritizing? Some say that “cash is king,” whilst others argue that “profit is everything,” but what is the truth? Let’s take a closer look and find out.
What is Cash Flow?
Cash flow is the money flowing in and out of a business. It refers to available funds rather than money tied up in uncollected profits or hard assets. A business needs cash to continue operations; without it, the owner cannot pay suppliers, staff, utility bills, or purchase inventory. If your business is a car, then cash flow is the petrol in the tank - you can’t move forward without it.
There are three main types of cash flow:
- Operating cash flow: the amount of cash generated from regular business operations, such as sales.
- Investing cash flow: cash earned from investments, such as securities, property, or the sale of assets. When your business is actively investing, this number may be in the negative, but it will become positive when these investments begin to generate a return.
- Financing cash flow: the net cash generated to finance the company, including debt and dividend payments.
Positive cash flow means that more cash is coming in than going out, and thus your business’ liquid assets are increasing. Negative cash flow means the opposite.
It’s normal to experience a short period of negative cash flow when investing in growth since you must first spend money to generate more liquid assets in the future. However, a sustained period of negative cash flow means that your business is running out of fuel, and you need to take action.
What is Profit?
In a nutshell, profit = revenue - expenses. It’s how much money your business is left with after you deduct expenses from your total turnover. Again, there are three main types of profit:
- Gross profit = revenue - cost of goods sold. This includes variable costs such as materials and labour, but not fixed costs such as rent.
- Operating profit = revenue - business costs. This figure includes fixed costs but excludes tax, interest payments on debt, and income from investments outside the core business realm.
- Net profit = revenue - all expenses, including tax and interest.
It’s important to understand the difference between these three figures so that you can understand which costs have the greatest impact on your net profit.
Which is More Important?
Both cash flow and profit are important to the long-term success of a business, but in the short term, it may be prudent to prioritize one over the other. It’s possible to be in profit and yet run out of cash, and vice versa. Both matter enormously, but which one is more important depends on your current financial situation.
For example, a business may turn a profit each month, but if that money is tied up in hard assets, they may be unable to pay employees and suppliers and thus will eventually be forced to cease operations. In this instance, the business should prioritize cash flow.
On the other hand, a business may have a healthy cash flow but fail to make a profit due to substantial debt. Here, it may be prudent to prioritize paying off the debt to become profitable.
When a business fails to generate a profit over a sustained period of time, cash flow will be negatively impacted. It’s important to balance cash flow and profit carefully, but this can be difficult to do - especially when you’re a busy business owner with a lot on your plate. For this reason, it’s worth investing in a quality bookkeeper who can help you to maintain a healthy cash flow whilst generating a profit without losing your mind in the process.