Read Millionaire Fastlane
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- Jun 25, 2019
I've been secretly hoping for a post like this but have been too dumb to know what to ask for... "Umm, Mr. Rich Guy, how do I business?"Here is the absolute minimum I would recommend in terms of accounting and financial education for any business owner (or aspiring business owner):
- Learn to read a Balance Sheet. This is the best long-term measure of your business health and success. I would recommend picking a dozen or so medium and large public companies, and looking at their balance sheets. That will give you a decent idea of what's on them, how they vary, what they tell you about how the company operates and where it's value comes from, etc.
- Learn to create your own Net Worth Statement (Personal Financial Statement). This is basically your personal Balance Sheet. And like the Balance Sheet, it is the best long-term measure of your personal financial health and success. Create yours and update it at least once a quarter (I update mine weekly).
- Learn to read a Profit and Loss Statement (P&L). This is the best indication of the profitability of your company, and will give you an indication of how efficiently your company is being run (and where it's not as efficient as it should be).
- Get your business in QuickBooks. You don't have to be a QB guru -- just hire a decent bookkeeper to set up your books and teach you how to enter the most common transactions you'll encounter in your business (you can "memorize" those transactions to make them very easy to enter). Worst case, spend $100-200/month to get your bookkeeper to enter the tough transactions for you. But, having all your books in QB will allow you to easily see your own Balance Sheet and P&L.
- Learn how to calculate Gross Margins. This is an indication of how efficiently you're creating your product or providing your service. Once your business is in QB, it's easy to calculate your gross margins. Then, figure out what the gross margins are for your leading competitors (or big companies in your space), and compare yours to theirs. If yours are much lower, figure out what you can do to increase your margins (it may just require scale, but this is important to know). If your gross margins are much higher than your competitors, it's worthwhile to ask yourself whether your product/service is meeting the standards your customers will expect.
- Learn how to calculate Operating Margins. This is an indication of how efficiently your business is being run overall. Once your business is in QB, it's easy to calculate your operating margins. Then, figure out what the operating margins are for your leading competitors (or big companies in your space), and compare yours to theirs. If yours are much lower, figure out what your competitors are doing differently in terms of managing their business.
- Understand Cash Flow Management techniques. By far the biggest reason I see entrepreneurs struggle is due to short-term cash flow issues. Understanding how to forecast and manage cash flow will keep your business from hitting situations where it can't grow inventory and it can't grow revenue...or worse yet, where it can't meet its financial obligations.
- (Optional) Read the book Profit First, by Michael Michalowicz. If money and financial management of your business isn't something you're comfortable with, this book will give you a formula for ensuring that you generate profit in your business from day one. More experienced entrepreneurs may not be a fan of some of these techniques, but for new business owners, this book can be a game changer. Btw, Michalowicz is one of my favorite business authors (he has 5 books), and he was on my podcast a couple weeks ago...I think the episode is most definitely worth listening to.
In terms of getting your head around the financial aspects of your business, I would say that the above is the very minimum every entrepreneur or business owner should understand before (or while) jumping into business.
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