How to use your revenue wisely
January 9, 2010When you start to earn money in your business you have revenue. When you have revenue you need to have a clear plan on how you shall distribute that revenue inside your company.
Many entrepreneurs treat their company finances as they do their own private finances. Badly that is. That is why so many company startups fail.
Some startups don’t earn any revenue so they, obviously fail because they burn money they don’t have. Expecting to earn some revenue in the future to make up for what happens today. Usually no revenue comes in and they are doomed. Bad news as you can imagine. But then you have startups that earn revenue like no one else. But still they go bankrupt. Why? See above for the answer: Bad allocation plan.
Say you earn $10,000 in revenue year one. What does your allocation technique look like? Do you even have any kind of allocation strategy? You better think about this, because bad money management is the curse of many fine companies. In Sweden we have SAAB, in the US we have GM for example. Fine companies. They earn a lot of revenue. So much revenue in fact it would make every normal human being salivate. But still they can’t make ends meet. Reason: bad money management. They spend more than they bring in and what they bring in is not properly re-invested etc.
Let me show you one way I allocate money in a company:
-Revenue (total): $10,000
-Investment account (30% of total revenue): $3000
-Salaries (total allocation): $2500
-Purchase of products/services: $1000 (I want to earn at least $10 for every dollar invested. I need the operating marginal)
-Other relevant costs: $3500
The investment account is used to purchase passive incomes and capital gains. A way of hedging the core business. The sum that is allocated to salaries will not be breached. I will have to use the product/services budget if I need additional help. There has to be rules for how much you can spend on hiring people. Hiring people and having salaries to pay is usually one of the biggest costs in a business. And it is not that easy to get rid of salaried people if you have too. You businesspeople know what I mean. Unless you say “to hell with the employment agreement”. Usually a stupid idea to begin with.
This is just a way of pointing at how you can stay in business when you have succeeded at getting paying customers. Earning money is no rocket science, but staying in the game can be. It takes strict rules. Strict money management policy´s that shall be followed no matter what happens.
