I’m a firm believer that the cornerstone of a successful business is understanding finances. Or, at the very least, partnering with someone who does. That being said, there are several financial lessons business owners (including myself) learn the hard way.
In an effort to help you avoid struggling to learn these financial lessons, I’ve decided to lay them out for you in this article. Some of these may seem obvious while others may surprise you.
Business is inherently risky.
My Facebook feed is full of people making promises about guaranteed income through a specific business model. “There’s nothing to lose!’ they say.
Well, that’s not true. The truth is there’s a lot to lose. Some of these business have large startup costs and very high failure rates. On top of that, there’s no such thing as guaranteed income. That’s why business is inherently risky.
This is one of the financial lessons business owners tend to learn the hard way. They get really excited about an idea (or were baited by clever marketing) and two months in they realize it does require risk. A lot of people are not comfortable with this and therefore bail.
That being said, true entrepreneurial spirits understand that everything is a risk. To me, having one job and one paycheck is riskier than having a business where I control the income. The problem is not everyone sees it that way and wishes they hadn’t started a business. That’s why understanding that business is inherently risky is an important financial lesson to learn early on.
There is no build it and they will come.
I’ve had to help a lot of clients come to the painful reality that there is no build it and they will come in business.
This is another one of those financial lessons people, unfortunately, learn the hard way. Sometimes years go by and they wonder why they are still broke. More often than not is because they are living some Filed of Dreams story that just isn’t true.
The reality is business requires some serious hustle, sales skills and chutzpah. This is especially true in the beginning.
The difference between gross and net.
A lot of business owners don’t realize there’s a difference between gross and net income. You could be making six figures but if you’re putting those six figures back in your business you have a net profit of $0.
To be honest, this has been one of the hardest financial lessons I’ve personally had to learn. While I consciously knew the difference, working on increasing my net income proved to be a challenge. I’ve gotten better at it over time and with experience, but it certainly hasn’t been fun at times.
All the money isn’t yours.
Another one of the tough financial lessons for business owners? The fact that Uncle Sam takes a huge chunk in taxes. Seriously, that employment tax is killer.
This means you need to account for gross, net profit and taxes in your business finances. When I did the math, I realized I would need a consistent five-figures each month to comfortably meet my business and personal goals.
The good news about financial lessons for business owners is that most of us improve as we go. There really isn’t a manual for this stuff and experience is often the best teacher.