If you were to crack open any economics textbook and look up the definition of money, I’m confident that you’d find a variation of the same definition in each of them:

1. Money is a unit of account
2. Money is a store of value
3. Money is a medium of exchange

In my experience, the vast majority of the population’s relationship with money starts and ends with number three. For most people, this (what I would define as toxic) relationship with money will result in less than stellar personal financial performance. However, for entrepreneurs, not addressing this issue will result in nothing short of catastrophic failure.

Entrepreneurs are a unique breed; founders are responsible for performing at the highest levels concerning a myriad of responsibilities. But perhaps one of the most important of these responsibilities for a founder is acting as a steward of company (and in some cases, investor) capital. Personally, I believe that outside capital, whether in the form of debt or equity investment funding, can exacerbate the plight of overspending I see in most startups. That’s why in general, I recommend against outside funding and promoting the idea of bootstrapping, although I could dedicate an entire article to this topic.

It should serve as no surprise to me then (although it still does) that most businesses are not profitable. In fact, this epidemic is so widespread that about 50% of businesses fail (source: Bureau Of Labor statistics) within just five years. If you dig a little deeper, you’ll also see that the top reason entrepreneurs list for their failure is inadequate funding, to which I say bullshit! Some of the most successful businesses I’ve ever seen (and even my own) have started with damn near nothing. It’s easy for an entrepreneur, or anyone, to take an easy way out of accountability. “If only I had more money, I would have made it!” They should really be saying, “If only I had more money to mismanage, I could have wasted it for a little longer.” Although, in my experience, even the latter is not true. Typically poor money managers just waste more faster.

Change The Way You Think About Business Ownership

My first set of recommendations, especially for those of you who come from corporate backgrounds, is this:

1. The quality of your professional life will not be the same as when you worked for a large company. You will not and should not expect to have the Herman Miller chair, the large office with a view, the expensive dinners out, etc.Expect none of that, and shun vanity away like it’s the plague.

2. Negotiate everything! Remember, this money isn’t coming out of your employer’s corporate expense account; it’s coming out of your pocket! In the beginning stages of your business (and for as long as you reasonably can afterward without being “pennywise pound foolish”), fight tooth and nail for every penny you can. Tell your vendors you’re poor if you have to because the truth is you are. Even if you start with a million dollars, you are poor until you start growing your retained earnings account by way of profit! The most successful people I know, people who have accumulated billions (yes, with a B), are people who have been able to maintain this mindset throughout their entire careers.

Most entrepreneurs rebuke pointers like the ones above by saying things like, “the focus should be growth, not saving,” or “how can I grow if I don’t spend?” To which I say, if you can’t make money while you’re growing, then you’re in the wrong business. There are, of course, few exceptions. Businesses with long R&D cycles, such as pharmaceuticals, certain types of tech, etc., but most startups don’t fall into this category. Most new businesses are in straightforward industries, and the concept that you should be profitable within weeks/months and not years apply to all of them.

I am oft reminded of the following business anecdote, “Revenue is vanity, profit is sanity, cash is reality.” Growing revenue for the sake of growing revenue is, in my opinion, a foolish endeavor.

It doesn’t matter what your business does, whether it’s a cabaret or caregiving for children with special needs. As noble as your cause may be, your business is a going concern, and to remain that way, it needs to remain solvent. To do this, it needs to sufficiently provide for you (first and foremost), your employees, and successfully complete its mission to society. If it does one without the other, then it’s destined to fail, and it will not be long until that final destiny is realized.

Profit First – The Rest Comes Later

We need to return to our three economic definitions of money to address these issues. Namely, the first two. Starting with number one, unit of account. Personally, I think of a business as a game. As a founder, your job is to play the game well. But how do you know if you’re winning? How do you keep score? If we remain pragmatic, there is only one honest way, financial profit. Revenue comes when your product is good; profit comes when your business is good. There are many businesses that I’ve seen with eight or even 9-figure revenue numbers that are not profitable. That’s simply because the business is not good, or rather it would be better to say it’s not run efficiently.

So then, how do we have our businesses run efficiently? We start with the end in mind, profit. When you structure your business, you should keep in mind with every decision how much profit your business needs to make (a lot of this will depend on your goals), i.e., how much do you need to sustain yourself, if you want to sell your business what profit levels make your business saleable, etc. Once you’ve figured this out, now comes the “creative” part of entrepreneurship. How do you get your business to successfully provide its products/services to your customers while maintaining this profit margin? It’s perfectly fine to “work towards” your profit goal. Perhaps historically, you’ve been hemorrhaging cash, and now you want to get to a 20% profit margin. It would be unrealistic to accomplish this goal overnight, so start small… start very small. In this case, start with reducing your losses, or perhaps a modest goal of 1% profit, and work to get there within three months. Then re-evaluate and continue the trajectory until you hit your goal.

Finally, money as a store of value. This is perhaps my favorite function of money, and with enough practice of prudent financial principles, it will be yours too. Each year as your profit accumulates, it will flow into the “retained earnings” account on your balance sheet (this is where owner distributions are meant to come from). And ultimately, cash in your bank account. These are the two places where you can see the result of years of discipline and hard work.

If you are interested in learning more about these principles and how to transform your business into a profitable venture quicker than you ever thought possible, complete this form to see if your business is a good fit for me to step in and help you!