Financial Literacy for Business Leaders
Understanding the key financial components of business
By Connie Jeon, DPT, MPH
Financial intelligence—the understanding of how to acquire money and what to do with it—is one of the most important qualities to develop as a business owner.
However, many private practice owners have little to no training or experience in finance. This article will explore the basic concepts of cash flow and profit margins, how they’re related, and how leveraging assets can help increase profit.
Defining an Asset
An asset is something that directly creates revenue for your business. The more assets you have in your business, the better. There are many types of assets to consider. You are an asset. Others would include capital, courses, programs, employees, apps or technology, and customers. Money is earned when you acquire assets and use them to grow or maximize your profit.
Growth and Profit
Think about your business in terms of two main things: growth and profit. If your practice is profitable but not growing, you do not have a business—you have created a job for yourself. Growth is essential for success if you define success as more than just maintaining a job.
In the early stages of your business, you may sacrifice excess profit in order to grow. It is also important to have a clear vision for your life and business goals to know exactly what kind of business you want to create and that will allow you to achieve these goals.
Consider how much time do you want to work each week? How much vacation time will you need? How much do you want to make? What personal priorities do you want to respect?
Your business is an asset that can grow into a profitable business to support your long-term goals. Investing in this asset as much as possible until your business matures is key to creating a business that produces ongoing revenue.
Customer Acquisition Costs and ROI
You must pay to earn your customers at first; this may come in form of marketing and advertising expenses, or even salary expenses for marketing personnel. The goal is that customers will pay you back in profits over time.
For example, if it costs $100 to acquire a customer, and that customer spends $1,700 in one year at your practice, that $100 was an investment that brought you that revenue. This is an excellent return on (ROI) of 160% in one year. However, consider whether that customer returns each year for care, or for different treatments or services. The lifetime value of that customer may be much higher, and you only spent $100 to earn their business.
It’s critical that you understand the average lifetime value of a customer to help you understand how much is a reasonable budget for marketing and customer acquisition costs. In addition, tracking marketing investments to determine the ROI and customer acquisition cost of each campaign or effort can help you determine the efficacy of different campaigns and whether to continue with those marketing efforts. Once you establish a formula for acquiring and nurturing new customers consistently, then focusing on growing your business becomes a strategic system.
Most businesses tend to run on lag method, which is to use lag reports to make decisions. This means they look at what happened one to two months ago to decide what to do this month, which can prove challenging at times as accurate and informed decisions are critical in business. You want to be making proactive adjustments and decisions using predictive analytics instead of reactive decisions using such reports.
You can do this by creating a lead profit report that details your profit ahead of time instead of waiting to see what happens. Most business owners and bookkeepers calculate revenue first then expenses to see how much is left over for taxes, profit, and growth. This is a backwards way to think about your business. Instead, decide ahead of time how much you want to take out in profit, how much you need to save for taxes, and how much you want to reinvest in growth. Lead profit reports are the perfect way to do this.
To begin, plan your revenue. If your revenue is predictable, you can plan for exact amounts of profit, taxes, and marketing investments ahead of time. Even if revenue is unpredictable, as it can be when relying on insurance payments, you can choose an appropriate profit percentage ahead of time (giving yourself some error margin), and use the remaining amount as your expense budget. Mike Michalowicz outlines this concept in his book, Profit First: Transform Your Business From A Cash-Eating Monster To A Money-Making Machine.1 The idea of putting profit first is an excellent way to forecast and grow your business.
Forward finance is more about looking ahead with clear goals for revenue, profit, taxes, and marketing so that your decisions about your business expenses are logical based on numbers. This makes it easier to make sound business decisions such as: What can you afford? When do you hire staff? How much do you pay for contractors and other optional expenses? Keeping this in mind will set you up for success.
Math vs Drama
There is a big difference between simple math of a business and the emotional drama of how you feel about your financial circumstance. You must learn to separate the facts from your feelings. Here are important financial numbers that you must pay close attention to:
- Yearly revenue goal/projected revenue: This should stay consistent throughout the year. You need to believe in this goal.
- Current revenue: It may be lower than where you want it to be; know this number at all times.
- Profit: This tells you the health of your business and to how much taxes you’ll be paying for the year.
- Cash in the business: This is how much working capital you have right now. Knowing this number helps you to avoid problems and deal with any issues before they get too serious.
- How long will the cash last: This allows you to plan ahead, spot any cash shortages that may come up, or identify when you have more than you need so that you can make good use of the excess.
Understanding your business logically and making decisions from mathematical forecasting will always help you remain objective and goal-oriented. Doing so will also help youavoid the emotional stressors that come with managing the sometimes-complicated financials of a running a business.
Brush Up on Financial Literacy
As a business owner, it’s critical that you spend time developing your financial literacy to understand the elements that will help grow your business and help you reach your goals.
1Michalowicz M. Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine. New York, NY: Portfolio; 2017.
Connie Jeon, DPT, MPH, is a founder of Alkaline Wellness, Functional Yoga Medicine Certification, and Alkaline Method ™ in Suwanee, Georgia. She can be reached at email@example.com and @drconniejeon on Instagram, YouTube, Twitter, Facebook, and LinkedIn.