Money Matters

According to Bank of America’s 2021 Small Business Owner Report, 75% of small business owners were concerned about the pandemic’s impact in the fall of 2020. That number has now dropped to 55% in 2021.

It’s time to get your business going, and there’s no better place to get started than in Utah.

With the rise of Silicon Slopes in recent years, it’s little wonder Utah is doing so well. I’ve found it thrilling to watch businesses skyrocket as fast as Lehi can build another “spaceship” in Silicon Slopes. But, as every entrepreneur knows, it takes more than grit and a dream to make a business successful: It takes financial savvy.

I remember the day I told my husband I was starting a business. He is an investment banker who specializes in underwriting corporate real estate — a man who lives in spreadsheets and thinks in numbers. He asked me about how I was going to keep track of my clients and business transactions. So I showed him my (very simple) spreadsheet. He looked at me, said “Hmmm,” and walked out of the room. Five minutes later, he came back in and said, “I’m your CFO.” Clearly I had a lot to learn about finances!

Many entrepreneurs are on the same page with me. We’d rather be focusing on client services or heads down in a project, but I’ve learned over the years that knowing your finances as a small business owner is a necessity. Here are three things I’ve learned:

You need to know how to crunch your own numbers.

You have to know what’s going on. Without a good understanding of your financial situation, you may hire too fast or too slow. You may invest in the wrong areas. You may delay a purchase you really need.

One way to do this is by creating and maintaining your income statement or profit and loss statement (P&L). This should be part of your business plan, and it’s what investors and bankers will want to see first when they’re considering funding you. Basically, the P&L tells you whether your business is profitable or not.

It sounds simple, but don’t underestimate the power of having a snapshot of your business’ finances. Here’s a breakdown of the basic but important questions the P&L answers:

How much money are you bringing in from sales? This is your revenue. The lower this number, the lower your expenses need to be.

How much are you spending on making your products or delivering your services? This figure is your direct costs or cost of goods sold (COGS).

How much money do you have left over to cover expenses? Take your revenue and subtract COGS: This is your gross margin.

How much does it cost to keep your doors open? Subtract your COGS from your total expenses and you get your operating expenses.

What’s your operating income? Your gross margin minus your total operating expenses equals how much you make before interest, taxes, depreciation and amortization.

What am I paying in interest, depreciation, amortization and taxes? These help you calculate your operating income and bottom line.

What is my bottom line? If revenue is your top line, then your bottom line is revenue minus COGS, operating expenses and anything else you’re spending.

Bootstrapping may be better than seeking funding at first.

Many people have the dream of having their businesses well-funded by venture capitalists as they grow. But bootstrapping is oftentimes the best (and only) way to go at first.

“These days, most VCs want to see some traction — a prototype, some revenue or repeatable users — because seed rounds have gotten larger, making investments riskier,” said Bram Berkowitz at Entrepreneur’s Handbook. “So, even if a startup or founder intends to pursue VC funding, they will likely be forced into bootstrapping (e.g., Kickstarter) for a while to even get to a point where they can raise funding.”

Back in 2009, I started Osmond Marketing in the wake of the Great Recession. My husband and I had just received a $10,000 tax refund, and we decided to split it in half and invest in our own endeavors. I used my portion to start Osmond Marketing, and he used his money to invest in the stock market. It wasn’t much, and it wasn’t easy to build the business from there — but it taught me how valuable a few dollars are in business and how we can’t take them for granted.

Bootstrapping can mean that you move more slowly, but it’s also less risky when you don’t have to worry about losing your investors’ money. It also doesn’t force you to try to grow very quickly if you want to take more time scaling. Depending on your market, bootstrapping may be the way to go as you get started.

Debt financing and equity financing have different advantages and disadvantages.

Before you decide how you want to make money (by borrowing, selling a portion of your equity in the company, or some combination of the two), it’s important to understand the benefits and downsides of each method.

With equity financing, you don’t place any financial burdens on the company, and you don’t have to worry about repaying the money. However, you lose a percentage of your company. You have to share your profits and consult with your investors before you make any large decisions. And if you ever want to buy them out, it’s going to be more expensive than what they originally paid you.

With debt financing, on the other hand, you don’t give up control of the company, and your interest is tax deductible. But if your profits don’t grow as steadily as you want, you may not be able to afford to make your payments.

So, how do you decide what’s best for you? Weigh out the pros and cons, or consider this solution:

“Many companies use a mix of both types of financing, in which case you can use a formula called the weighted average cost of capital, or WACC, to compare capital structures,” according to Business News Daily. “The WACC multiplies the percentage costs of debt and equity under a given proposed financing plan by the weight equal to the proportion of total capital represented by each capital type.” Here’s an explanation and template for Excel if you want to try it out:

As a small-business owner, you’re already a multitalented person. Learn to crunch those numbers, try bootstrapping, and learn the advantages of debt financing versus equity financing. These steps will help your business be more successful — and you might even find yourself enjoying the math!