What is one piece of financial knowledge you’ve gained since starting your business that can help other early-stage entrepreneurs?
The following answers are provided by members of Young Entrepreneur Council (YEC), an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.
1. Unit Economics Trumps Revenue
Regardless of what many investors (or your friends) will say, unit economics builds a business. If you spend less to acquire a customer than their lifetime value, you have the opportunity to build something real. It’s tempting to focus on revenue because it’s easy and it’s the biggest number. But a business of any size with strong unit economics is a master of its own destiny.
2. Resist the Impulse to Overspend
It’s easy at the beginning to overspend on things that aren’t directly tied to expanding and growing your business. We get sidetracked by shiny, new technology or the latest productivity tool. Before spending any money, analyze the ROI and how your purchase will move your business towards achieving its strategic goals. If you can’t clearly define that, you shouldn’t make the purchase.
3. Know Your Break-Even Point
It’s incredibly important to know your break-even point, the place where you go from “in the black” to “in the red.” Many founders are not in tune with this “line in the sand” and wonder why the business begins to struggle. It’s surprising how quickly a business can go from comfortable to bleeding cash. Know your break-even point intimately.
4. Account for All Costs
It’s easy to just account for the surface per-unit costs (CPC, commission, etc.). It may be painful, but try to calculate underlying costs (branding spend, incremental hires, etc.) as well, even if they’re very rough. Are your fixed costs truly fixed? You can’t build a scalable “growth engine” if you’re not willing to be honest with yourself about the true per-unit cost of acquiring new customers.
5. Cutting Salaries May Temporarily Cut Costs, But Your Revenue Will Suffer Long-Term
When times are hard, it’s easy to make huge layoffs to save your company. But hiring the same quality of workers later can be costly and time-consuming. Furthermore, no job is disposable because as much as salespeople bring in the customers, customer service representatives help increase each client’s lifetime value. Every role is worth salvaging, so you have to be creative in your cost-cutting measures.
6. Prepare for Unanticipated Losses
When I started my company, I was conservative about profit projections and budgeted expenses very carefully. What I didn’t do, however, was account for situations in which a customer would refuse to pay me or I’d have to shell out extra funds for a project that didn’t turn out quite right. My best advice? Set aside a cushion for these inevitable scenarios and they will be far less painful.
7. Outsource Your Bookkeeping
For years, I was doing the books for my business and hated it! I have since outsourced all of our bookkeeping to Bench.co and love it. It’s been the best thing we’ve ever done financially; I set myself free from this task and we get our books on time to provide to our investors. Quick tip: Don’t do it yourself!
8. Determine Your Worth
The No. 1 question to ask yourself when you’re starting out as an entrepreneur is, “Am I building something that people actually want?” Determine your product’s worth by charging up front; someone’s willingness to pay for your product will tell you a lot about your business. At Wistia, we started with a paid plan only, and over the past 10 years, we’ve progressively made the product more and more free.
9. Maintain a Spreadsheet With All Your Revenues and Costs
You should maintain a sheet with all your revenues and expenses almost every week. Don’t hire an accountant to do this; you want to do this yourself to have the complete picture. You can group your income and expenses into various heads to have a good understanding of the factors that affect your balance sheet. This will help you to plug the pilferage and flow the money into the right activities.
10. Keep Business and Personal Finances Separate
Don’t mix business with pleasure; always keep your business finances separate from your personal finances. Otherwise, it will get confusing and you’ll end up putting more of your money into your business. You can even falsely assume your business finances are in great shape when, in reality, your personal accounts are simply covering up the problems.
11. Revenue Transparency Isn’t as Scary as You Think
All of our business metrics are public on Baremetrics, but the decision took a lot of discussion between my co-founder and I. We were worried about what would happen if people noticed our churn rates going up or customers falling. Overall, being transparent has helped increase trust in what we’re doing and gain attention. Turns out, most people don’t sit and monitor your numbers all day anyway.