Financial Principles For Founders
If we’re going to work on your financials, we should first get on the same page about money, how it works and how to treat it.
Money isn’t just maths, it’s an emotionally charged subject, stemming right back to your childhood and how your family talked about it (or didn’t).
We all hold beliefs about what money can do, what we should use it for, and what it says about us.
Sometimes these show up as “limiting beliefs”, rules that only apply to you, which affect how you’re “allowed” to make, spend and keep money in your business.
Feel free to agree or disagree, but these are the foundational principles for how we’ll discuss and handle financial decisions:
Budgets let us tell our money where to go, rather than wondering where it went
Budgeting is a fancy word for planning – planning where we want our money to go.
A budget doesn’t magically change our situation, but it forces us to choose where we want to be spending our dollars, and where we want to be saving them.
There is zero reason to operate without a budget, it puts you at the mercy of momentum rather than controlling your momentum.
You can’t pour from an empty cup
Creating positive change in your community requires a great deal of energy.
It takes time, attention, money, enthusiasm, a loyal audience and a talented team.
At first, you can begin building these without spending much money.
Eventually though, you run out of pro-bono energy and need to compensate people for the effort they’re expending.
This is great – you generate meaningful employment for people you care about – but it requires a sustained pool of money.
The tight-assed approach doesn’t scale, instead creating a culture of scarcity than undermines your good intentions.
If there’s money in the bank, you can use it to advance your business or your cause.
Price is not a measure of your worth as a person
Setting prices is a tricky art, requiring a good knowledge of what things cost to produce and what the market is willing to pay.
It is not a psychological self-evaluation, where you let your self-worth shape your prices.
Just because you made something doesn’t mean it should be cheap.
Just because you knew how to solve a problem doesn’t mean it wasn’t immensely valuable to the customer.
Just because you feel like an imposter doesn’t mean you are an imposter.
Startups can do things that don’t scale
We celebrate “scalability” as a measure of business success, because it can be replicated by another team in another market.
While you might reach this point eventually, startups are allowed do things that don’t scale, at least while they are figuring out their model.
That means you can use your own car for deliveries, borrow the expertise of your friends and family, go over the top to win a customer, borrow equipment you can’t afford to buy, or work a lot of unpaid hours.
That’s part of the journey – you can afford to be cheeky while you’re validating your model, and take advantage of your perks and free kicks without guilt.
What gets measured gets managed
It’s very hard to improve something you’re not measuring.
Our natural tendency is to take proactive steps to fix whatever we monitor, like how wearing an activity tracker causes you to take more steps each day.
If you believe something is important, you’ll want a way of measuring it and tracking how it is performing.
Too many metrics will become a blur, but a few important numbers are helpful.
You are not going to be everybody’s cup of tea
Very, very few businesses are genuinely for “everyone”.
Some people won’t like your business – some will see you as too extravagant, others will see you as too cheap, too bland or even too niche.
Your job is not to adjust your menu to please every single person, it’s not possible.
Someone is going to miss out.
Attempts to include every conceivable customer raise extra headaches, making your business either too complex or too vanilla.
By accepting this from the outset, even celebrating it, we can ask a better question:
How might we become some people’s favourite cup of tea?
It’s more lucrative to delight part of the market than to try and appease literally everyone.
Money is not evil
Money is not good or bad, money is fuel.
You can use that fuel for whatever you like, but fuel doesn’t shape your personality.
If you see someone using money to be a jerk, chances are they were a jerk beforehand, money just magnifies their desires.
We can use money to magnify our positive desires too, be it through creating jobs, promoting a good cause, influencing beneficial behaviours, or redistributing wealth.
The love of money, as the bible verse says, is the root of all evil, especially when people feel justified in entering win/lose relationships to gain more of it.
Rather than shying away from wealth, it’s more effective to generate wealth and use it for good.
Profit =/= Profiteering
Some people still have a negative reaction to the word “profit”, perhaps they’re thinking of its evil cousin: “profiteering”.
Profit means making more money than you spend.
That’s not unjust or problematic, it means you have extra resources for whatever is next.
Not-for-profits essentially make a profit, they change the word to “surplus” which is almost the same thing.
The difference is that profits can be returned to an owner/investor, whereas a not for profit keeps or spends their surplus, but in the interim it’s all the same: leftover money.
Profiteering should be criticised – it’s when a business makes money at the expense of the customer, or in a way that is destructive.
Profiteering is driven by greed, it feels morally wrong, and it’s usually something a company doesn’t want published on the front of a newspaper.
Costs are like fingernails – you have to trim them constantly
Most parts of running a business become more expensive over time – more meetings, more maintenance, inflation, pay raises, larger premises, replacing equipment, etc.
Very rarely will a cost shrink on its own – you’re going to have to seek out opportunities to trim them.
The task is never-ending, there will always be a need to make systems more efficient, cut the underperforming product offerings, and re-allocate your time towards the most valuable tasks in your business.
It’s easier to do this on an ongoing basis, rather than leaving it too late and then attempting a big overcorrection that hurts your culture and reputation.
Tax is not the enemy, but it pays to be smart
Paying tax might not be so bad; it means you’re earning income and have the ability to support important social services.
The aim is to pay lots of tax, but no more than necessary.
We want an accurate understanding of what is our fair contribution, by taking advantage of all the relevant deductions, without resorting to evasion.
We can save thousands of dollars a year by learning the intricacies of our tax laws, but want to stop short of anything that might land us on the front of the newspaper.
Turnover is vanity, profit is sanity
Turnover sounds impressive, but it’s not meaningful on its own.
If you grow your turnover from $2m to $4m, but your costs go from $1.8m to $4.6m, you have a problem.
In that scenario, it would be better to grow slower while controlling your costs, so that you’re likely to make money each year.
Profits are what keep you alive.
Unsustainable growth might work for a season, but not indefinitely.
It's better to be a smaller, profitable business than a turnover machine that goes broke.
Your legal status does not make you a saint (or sinner)
There are a lot of awful not-for-profits, who waste their resources and spin their wheels.
There are a lot of wonderful for-profit companies, who make a real difference to their community.
The absence of profit does not make you a saint, and the presence of profit does not make you a sinner.
What matters is your measurable social outcomes and your integrity.
If you’ve prioritised both of those, pick whatever legal structure makes the most sense for your business and your cause, then let your results do the talking.
Tradeoffs are the essence of strategy
People think that strategy is about saying no to the bad things and saying yes to the good.
Not true – that’s called common sense.
Strategy is about saying no to good things, in order to say yes to the best.
That means tradeoffs – these decisions sting at first but pay off later.
You might have seen examples of this in quotes like “Good, Fast, Cheap: pick any two”.
Customers and team members are more understanding than you think, so long as you deliver on the strengths you’ve promised.
It might be reduced choices in exchange for exceptional quality.
It might be higher salaries in exchange for long hours.
It might be higher prices in exchange for indulging challenging customers.
It might be lower margins in exchange for increased certainty.
The important thing is that you don’t pretend that you can have it all, certainly not from the beginning.
Embrace the tradeoffs and pick what matters to you the most.
Assets are what make your business valuable
The way to avoid bottlenecks and dependencies is to create assets.
Assets are what help your business generate revenue, with or without you in the room.
There are physical assets like machinery, land, signage, and your fitout.
There are digital assets like your website, video content, customer data or training manuals.
There are intangible assets like your brand, reputation, trade secrets and methodologies.
These assets let you bring in new team members, expand into new markets, serve more people at once and potentially sell the business for an impressive amount in the future.
If the whole show depends on you showing up every day to make money, it’s a job and not a business.
Your first (or next) priority is to get financial clarity
If nothing else, we hope you see the need to create some clarity around your finances.
There is no possible upside to keeping yourself in the dark.
By establishing clarity on the numbers today, we can identify our strengths, weaknesses and interesting questions to explore next.
That lets us draft better business models for the future, designing a business that achieves our overall goals, while also removing the threats and anxieties that could otherwise ruin the whole company.
The best part about getting clarity is that it’s genuinely interesting.
You’ll be interested in where your revenue comes from.
You’ll be interested in how much it costs to create each product/service.
You’ll be interested in identifying exactly when you break even.
You might think “yeah whatever, why do we need to agree on all of that? Isn’t that all common sense?”.
Yes, to an extent – money brings out a lot of emotions, urgency, long-held stories, greed, shame, and imagined rules about business.
These rules affect how you handle tricky situations like
How much to pay yourself
How much risk you can take
How fast to grow
What to sacrifice and what to delay
Which corners can/can’t be cut
What to do with your profits
Make whatever choices you want, but it’s good to be self-aware enough to say “here’s why I am choosing to…”