This conversation happened just last week.

Friend: “Hey Connor, I finally hired a bookkeeper as you’ve been telling me to do.”

Me: “Awesome, what did you learn from it?”

Friend: “Learn? I just let him do my books.”

Me: 😒 

You need to know your numbers.

I’m aware that this is a constant refrain of mine. But if you don’t know your numbers, you do not know your business.

This is not to say that hiring a bookkeeper to get your financials in order isn’t an absolute necessity.

But it’s only the first step.

Once you’ve got your reporting cleaned up, you need to review it extensively until you can do the following.

• Articulate your costs

• Estimate your tax obligations

• Time your inflows and outflows

• Identify unnecessary expenditures

Articulate your costs

This is more than knowing what you spend and generally where the money goes. Instead, you should be able to know exactly what your costs are by line item, whether or not they’ve ticked up over time, and why that is. If they’ve grown over time, there must be a good reason behind that growth. If not, you might want to make some cuts.

Your expenses will likely fit into a few broad buckets, so I would advise organizing them into the following: Operating costs; Administrative expenses such as utilities, rent, and travel; One-time expenses such as software upgrades or project fees; and Marketing spend. Of course you’re free to categorize expenses in the way that makes the most sense for your business, but doing so will help you better identify trends and potential areas to cut back without undercutting your value proposition.

Estimate your tax obligations

Once your books are in order, pull in your CPA so that you can start putting funds aside to meet your tax obligations.

Starting this conversation early gives both of you time to work on reducing your bill while also providing you with a best-, base-, and worst-case scenario figure for what you might owe.

Depending on your personal cash policy, you can then determine how much you’d like to keep on hand before the bill comes due.

Time your inflows and outflows

61% of businesses fail due to poor cash flow management. Protect yourself by knowing exactly what’s coming in, what’s going out, and when both occur.

While this sounds simple, you should commit to this exercise until you know these numbers off the top of your head. Doing so ensures that you’ll always have just enough cash—right when you need it.

Mastering the timing behind your inflows and outflows then allows you to make smarter investments, grow faster, weather downturns, and avoid taking on unnecessary debt.

Identify unnecessary expenditures

Unnecessary expenditures typically fall into two categories: redundant or inefficient. Redundant expenditures are exactly what they sound like. They are the repetitive line items that can easily be right-sized without any hit to operations. If you’ve recently acquired a business or expanded to offer a new product or service, you’ll likely have a few of these.

Inefficient expenditures don’t exactly jump out at you while reviewing your expenses line by line. Instead, you’ll need to consider each outflow in terms of the value it creates for the business—both independently and in conjunction with other line items.

What does this mean in practice? It means having an answer for each expense to the question, “How does this outflow create value for my business?” Some of your answers will be obvious. For example, licensing fees, rent, and utilities may simply be a cost of doing business. Other costs, though, may not be as justifiable.

For instance, if you’re paying for task management software that neither you nor your team use, you can safely eliminate it from the budget.

Another thing to keep in mind here is that what constitutes an essential, value-creating expense for another SMB even in the same industry may not move the needle for you. This is why you need to carefully consider what creates value and what doesn’t.

Without this level of visibility, you’ll miss out on the opportunity to:

• Price strategically

• Optimize cash flow

• Lean out your operations

Price strategically

When it comes to low-hanging fruit in your business, pricing should be your first priority. This is especially true if you sell more than one product or service, haven’t taken a strategic approach to pricing before, do not regularly review and update your pricing decisions, or keep adding features and upgrades to your core offerings without raising prices.

When you know exactly how much money is coming in and from where, you can get a much better sense of where the value in your offer lies from your customers’ perspective. Double down on the value, and you can easily raise prices 10-25% without issue.

If you want to stimulate demand in a softer area of the business, knowing your cash position will give you the flexibility to offer discounts or up marketing spend to arrive at the level of volume needed to justify the short-term hit.

Optimize cash flow

When your books are in order, it’s time to start crunching numbers.

I break down in detail how to calculate each of these here, but you should regularly review the following:

1. Operating Cash Flow

   This tells you how much cash your business generates from core activities. It’s an even better measure of your business’s health than net income.

2. Free Cash Flow

   This tells you how much cash the business actually has available to use for growth, upcoming one-time outlays, etc.

3. Days Payable Outstanding

   This tells you, on average, the number of days it takes your business to pay an invoice.

4. Days Sales Outstanding

   This tells you how quickly your business collects cash.

5. Overdue Ratio

   This tells you the percentage of your receivables that are late.

6. Cash Reserves in Days

   This tells you how many days your business could survive without taking in any new revenue.

7. Burn Rate

   This tells you how quickly your business is running through cash reserves.

Lean out your operations

With clean reporting, you can not only identify and cut unnecessary expenditures, but you can also easily identify the value drivers in your business.

With these insights at your fingertips, you’ll be able to double down on what’s working, conserve time and resources by tossing out what isn’t, and reap better margins as a result.

So, if you haven’t yet, hire a bookkeeper.

If you have one, study your numbers until you clearly understand what’s going on in your business.

I’ve helped 75+ owners and counting grow their businesses with proper finance and accounting, so if you’re on the hunt for bookkeeping services or have any questions, shoot me a DM or reply to this email. I’m always happy to help.

Putting It All Together

Here are your top takeaways from this week’s post.

1. Hiring a bookkeeper to clean up your reporting is just the first step.

2. If you don’t know your numbers, you do not know your business.

3. To get the most out of your bookkeeper, you need to study your newly organized books extensively until you can articulate your costs, estimate your tax obligations, time your inflows and outflows, and identify unnecessary expenditures.

4. Failure to get your books in order and then know your numbers inside and out means you’re missing out on the opportunity to price strategically, optimize cash flow, and lean out operations. Don’t leave money on the table.

5. Hiring a bookkeeper will more than pay for itself, provided that you take their work as a valuable starting point to understanding your business.

Hungry for More?

1. Follow me on Twitter and LinkedIn for daily content to take your business to the next level.

2. Shoot me an email with your questions or requests for what you’d like me to write about next.

‘Til Next Time,

Connor