Archive for January 2014
Small Business Success Tips – Importance of Financial Margin
Every person who begins a small business usually does so because of a passion. They pour enormous amounts of energy, time, and money into making the dream become a success – both in its mission and financially. They dream of the day when the business is profitable.
Then, with hard work, determination, stout decisions, and some luck, the dream comes true! The business becomes profitable.
This is when a massive and critical decision is made that could ultimately dictate the entire future of the company: Should we SPEND all of the profits (to grow the business or on other personal dreams) or should we SAVE the profits?
Or is there an appropriate balance between SPENDING and SAVING?
I encourage you to chose to build FINANCIAL MARGIN by SAVING the majority of the first profits of the company! While I know you see incredible future opportunity that could potentially be realized by reinvesting (spending) the money back into the company, I believe financial margin is far more important to long term success of the company.
A great way to describe this savings is an “Obstacles & Opportunities Fund” (O & O Fund). Having this account fully funded allows you to encounter obstacles head on without it impacting your daily operations (not so fun) and to take advantage of tremendous opportunities when they appear before you (a lot more fun).
It is appropriate to place 4 to 6 weeks of operating expenses in a beginner O & O Fund. Long term, it is desirable to have at least 12 weeks of operating expenses.
Here’s what financial margin provides to you as the business owner:
- Long Term and Strategic Focus When you are strapped for cash, all of your time will be consumed with tactical decision-making. You will constantly be plagued with liquidity and working capital issues.
- Happy Suppliers Margin allows you pay bills on-time and early. Clients who pay on-time and early receive preferential treatment over slow-paying ones.
- Happy Customers Companies that are strapped for cash can be tempted to cut corners which can lead to service or quality issues.
- Happy Employees There is nothing that will make your best employees run for the exits like missed payroll. Margin ensures this isn’t EVER a problem.
- Restful Sleep You will sleep better when you know the bills are paid and you are prepared for unplanned obstacles.
- Investment Opportunities When you have financial margin, you will see opportunities you would NEVER see if you were broke. It’s an amazing phenomena I’ve witnessed many times.
- Better Profit Margins Broke companies who are strapped for cash put valuable products and services on sale or issue major discounts for early payment – all done to generate immediate cash to solve cash flow problems. It is literally equivalent to mortgaging the future. Companies with margin won’t engage in such behavior – because they don’t have to!
It’s never easy to force your organization to save. There will always be competing priorities. Chose to make Financial Margin the top priority.
Your financial manager will thank you. And then you will thank me when you are able to jump on a major opportunity – all because you chose to build financial margin.
You’re welcome. 🙂
NOTE: Welcome to the “Small Business Success Tips” series here at the wildly popular JosephSangl.com! Click HERE to access all previous tips in this series.
Will Your Child Live A Prosperous Life?
Every parent wants their child to thrive in life – relationally, spiritually, physically, and financially! We want them to make a difference!
New parents would never say, “I really hope my child experiences tremendous financial hardship and maybe even bankruptcy.”
Yet many newborns grow into adults who experience tremendous financial hardship and, yes, even bankruptcy!
So what can a parent do to help their child thrive financially?
- Give them money to start life out with?
- Pay for their entire college education?
- Buy them the latest and greatest technology?
All of these things can help a child grow up into a financially-savvy adult, but I believe there is one key factor that dominates all others when it comes to ensuring a child is equipped to win with money.
One Key Factor: The parents live it themselves!
When parents model strong foundational financial principles for their children, it is the strongest form of teaching one can ever deliver!
Children learn most by imitating their parents! Think about it: If you are being silly and stick french fries up your nose at McDonald’s – your children will do it too. If you slam doors when you are angry, don’t be surprised when your child does it too!
So let’s get to some practical thoughts on this:
- You want your child to learn to save? Save money every single time you are paid. Take your child to the bank (even though it might not be as convenient as using the Internet or an app) and deposit the money. When your child receives money as a gift, challenge them to save some of the money into a piggy bank or clear jar – so they can visually see it accumulate.
- You want your child to be generous? Give money away every single time you are paid. Better yet, put the money in your children’s hands and have them donate it for you. Donate time at a great charity in your town and serve those who are less fortunate. Again, when your child receives money as a gift, challenge them to give some of that money away.
- You want your child to invest? Invest money ever single time you are paid – even if it is just a few dollars. Show retirement plan quarterly statements to your children.
- You want your child to budget? Prepare and live by a written budget that you prepare before each month begins! When your child receives any money, help them develop a written plan for each dollar they have received. Show them the power of “giving every dollar a name.”
I know some parents might ask, “When is the right time to share financial information with my child?”
It’s a great question. I’ve chosen to veer towards teaching them even when it makes their eyes twirl – and then I back down because I don’t want them to associate finances with feeling miserable.
Here’s a good general guide:
- Age 1 to 2 Let them hold money they have been given. Let them help you put it into the piggy bank you have created. Use money as a basic counting exercise.
- Ages 3 to 4 Let them cut a small item they want to purchase from a store ad. Help them pay for it with money they have saved. This is also a good time to begin a “chore chart” where they can learn the great “work = get paid; don’t work = don’t get paid” principle!
- Ages 5 – 6 Expand the chore chart to include more detailed tasks. You can begin showing college savings accounts and investments at this age – just from a demonstration of “what Mommy & Daddy do” I even began bringing my daughter to meet with my financial adviser at this age. I just wanted her to “connect the dots” that her parents seek wisdom from others (this is a very important principle!)
- Ages 7 – 8 Take your child to the bank and open a basic savings account for them. Teach budgeting basics (Income – Outgo = Exactly Zero; Give|Save|Spend; Spend less than you make; Save money for a rainy day) and require them to plan any money they receive. Let them deposit the money at the bank.
- Ages 9 – 12 Continue to increase the chore chart. Begin explaining how mutual funds and stocks work. I chose to teach my daughter about mutual funds using companies she was familiar with (the company that makes her favorite cereal).
- Ages 13 – 18 It is at this state that you can begin a “monthly allowance” that allows you to transfer financial responsibility to your child. This allowance can begin with requiring them to pay for their own school lunch and then increase it to responsibility for all of their clothing, food, and entertainment. The principal is simple: Require a budget before the allowance is distributed. Distribute the money. Conduct a review at the end of each month. Have a “lessons learned” conversation and then start over again the next month. Take your child with you to meet with an investing adviser.
What would you add to this list? What questions do you have?