When you start your own business, you want it to do well. That’s why it’s so important to build it on the right foundations. Those pillars provide stability for your business to grow on. And it’s no different for your financial system. It, too, needs to be built on the right foundations. Because without it, you’ll find yourself and your business floundering.
There are four key pillars to consider for a sound financial system to be put in place. Otherwise known as the 4Ps, these are pricing, profit, performance, and planning. So if you’re looking to get your business onto solid financial footings, keep reading to find out more about each of these pillars.
This is the main one I talk about the most because it’s so important. If you can get your pricing right, particularly in a service business, other things will follow. Getting your pricing right means you can pay yourself more, earn more, and pay other people to do things. In short, you can grow your business.
And growing your business doesn't always mean getting to be a big agency or a 7-figure business. It's actually about what you want it to be and working in a way that suits you. You may have young kids and want to work less to spend more time with them or have a chronic health condition you want to work around. Getting your pricing right can give you the financial freedom you want and need.
Pricing affects your revenue, but you also need to look at what your business is costing you. You need to start by making sure you’re paying yourself a decent amount, so work out how much that needs to be. You can then look at your costs. Profit is your revenue, less your costs. If your revenue is greater than your costs, you're making a profit. If it's less, you're making a loss.
So start looking at your profit and how you might manage that. What would happen, for example, if you took on a Virtual Assistant or had to pay an extra X a month? What would you need to do? Would you need to put your prices up? Would you be looking to take on more clients or create a higher value service?
This pillar is all about business performance. You need to understand the key performance measures (or key performance indicators - KPIs) in your business. There will be a few financial performance measures you’ll need for all businesses, such as revenue, profit, cash, and your tax position. But there are also performance measures based on the type of business you’re in. For example, if you’re in marketing, it will include marketing as a percentage of your revenue. It might be how much cash is in the bank or how much you're paying yourself.
You also need to understand all the other measurable things in your business. Things like how much you make from your email subscribers, how many people you have on your list, or what reach you get on social media. Those things matter to you and can make a big difference to your business.
When it comes to your accountant understanding the position of your business, they're not doing any planning. They're doing a year-end thing and always looking backwards in your business. And planning and forecasting isn’t something you should be asking them about, and you need to be the one that is looking forward.
For example, you might want to take on a VA for several hours a week or take on a member of staff for a certain period of time. You’ll want to know if you can afford it without panicking that you can’t pay them if you lose a client.
Planning enables you to look at the different scenarios and plan accordingly. You may decide you can afford to keep this person until your revenue drops by a certain amount. Or you may forecast a VAT bill of x amount and know you need to ensure you’re keeping 19% of tax back from your Corporation Tax or 30% for your sole trader accounts. It’s about looking forward to your business and seeing how you might move it from where it is now to where you want it to be.
If you're looking to get your business onto solid financial footings, you need each of the above four financial system pillars in place. They will help your business grow and give you the stability required, to make informed decisions and help your business flourish.
If you’re looking for some help with your pricing, why not check out my pricing calculator? It’s perfect if you’re stuck over setting your prices, aren’t sure what your minimum price should be, and are looking to pay yourself a decent wage. You can gain access to my pricing calculator here.