Money Talks (Part 3): Practical Tips to Save Money, Plus Investor’s Financial Questions
This is Money Talks (Part 3), the final post in my series about improving your financial health.
If you missed either of the first two articles, you can find them here:
In this video, I want to give you some practical tips that you can use today to save money in your business.
Owning multiple 7- and 8-figure businesses has taught me that money wants to “move,” and it’s up to you as the CEO to guide it in the right direction…
So I’m going to share some advice that’s helped me improve my relationship with money and start directing it toward the financials goals we’ve been talking about in this series.
I had to learn this stuff the hard way — namely, by going broke after I sold my first business.
But you know what? I’m grateful I did, and I’ll tell you why a little later.
Lastly, I’m going to share the questions I was asked when one of the largest companies in the world wanted to buy my business. (When you can answer these for yourself, it will absolutely help you build a larger and healthier organization.)
Recap: Two Action Items from Parts 1 & 2
So far in this 3-part series, I’ve talked a lot about my own finances, but I’ve really only given you two action items:
- 1. Look at your Profit & Loss report by the 10th of every month
- 2. Set Liquidity Goals in your personal life and business life
Two pretty simple things… But if you’re not doing them, then you can’t benefit from them.
Treat this like an exercise program, or a diet: Consistency is the goal. A little effort every month goes a long way.
Okay, let’s jump into Money Talks (Part 3).
Watch Out for Recurring Expenses
“What recurring expenses do we have?”
You want to ask yourself this question on a quarterly basis (and if Zipify is on that list, you want to keep it!).
I’m just kidding, but really, you might be paying for things like Wistia, Zendesk, Dropbox, Shopify, and other random things you haven’t used in six years that you’re still paying for. Everyone reading this post has at least one unnecessary recurring expense — I guarantee it.
If you can save $200/month in recurring expenses, that’s $2,400/year that you can put to use in another area of your business. That’s energy being siphoned out of your operation for no reason.
Make no mistake, we’re in the optimization business, and every little thing adds up. I never stop looking for leaks, because guess what? They’re systematic issues.
And if you’re not looking at your recurring expenses, you’re probably not looking at a bunch of other problems piling up, either.
Remember When $200 Was A Lot of Money?
Twelve years ago, I was working at a special effects makeup shop in NYC.
I didn’t have an ecommerce business yet, and I took a job at this shop because I was trying to leave the life of professional poker. I was going straight, know what I mean?
So I was out there selling makeup and wigs for a living, and one day the owner of the shop sold fifteen Elvis wigs in a single order.
I still remember it. This single order added up to $150, and I thought:
“Ez, if you ever sell 15 Elvis wigs and make $150 in a day, then you’ll have made it.” It seemed like a week’s paycheck or something, maybe more.
You Gotta Respect the Monies!
My point is that you have to respect the money.
You have to feng shui it, to use the parlance of our time, because if you don’t build a stable foundation for it — if you’re not looking after it — it has nowhere to grow. It’s just going to leave.
You need to create a “container” to protect and hold your money, and that’s one of the reasons why it’s actually better to make money incrementally than all at once.
Your capacity to handle money is like your capacity for anything else. You can’t go to the gym and bench press 300lbs on day one. You don’t have the capacity…
But if you work at it for a year, eventually you’ll be able to do that and more. Your capacity for any given endeavor grows with as much attention as you put on it, right?
Well, money is the same way…
Which is why I feel really fortunate that Carrie and I made a bunch of money and blew it, and then made money incrementally over a few years.
Because now our capacity to handle it has improved. If you’d given me the money I have now back in 2012, I would have blown that, too.
So that’s Practical Tip #1: Review your recurring expenses every quarter.
Now, let’s talk about your taxes.
Do You Know Who Gets Their Money?
The IRS gets their money.
Don’t stiff the IRS because they’re going to get it, one way or another.
And yeah, you can do things like write off your expenses, reinvest capital, all this stuff is above board and a good financial strategists can help you with it… But at the end of the day, you have to pay your taxes.
Some people try to do it overseas and all kinds of shady stuff, but trust me, it’s not worth it.
In my experience talking with people who have tried it, the complexities of attempting to outsmart the IRS are miserable and it doesn’t save you any more money than if you just spend that extra energy to grow your business.
So be smart about it — get good financial advice, and every month put money aside to pay your quarterly taxes.
When You Need to Fire Your Accountant
Here’s another lesson Carrie and I learned the hard way: If you are your accountant’s biggest client, fire them.
If you haven’t hired one yet, ask for their clients’ revenue range before you sign up, and if you’re their biggest client then find someone else.
The management of money and the strategies within are dictated by volume, and the details of tax law differ based on the amount of money you have. That’s how the laws are designed.
So, where you fall in this range dictates what your strategy should be, and if your strategy is being dictated by someone who does not fully understand the range you’re in, then you’re screwed.
I’ve been there and trust me, you don’t want it.
So make sure you hire an accountant who understands your tax bracket and your income level, and who works with clients of your particular size.
How Much Profit Should You Reinvest In the Business?
Eventually, through all my ups and downs of being an entrepreneur, I learned that managing money is a lot like farming.
You invest it, you water it, and then you harvest it so you can start the cycle again.
Some business owners forget to do the first part. They don’t take their money and invest it back into the thing that brought them to the dance in the first place, and eventually they lose it all.
My viewpoint is that 50% of profit should be reinvested back into the operation, at a minimum.
Maybe you need to live on some of it, maybe you don’t, but I aim to reinvest 50% of the profit back in if I can.
But You Shouldn’t Forget to Harvest Either
Then there are the people who forget to harvest.
These are the business owners who don’t spend enough because they’re worried about losing the money, so they never enjoy it.
You have to do both, and this is the last advice I’ll leave you with: You must find a balance between these two mindsets.
If you want to manage your money in healthy, pleasurable way and achieve 5-year, 10-year and 20-year financial goals, then you have to enjoy it, too.
So, that was the talk that I wanted to give on money.
I tried to keep it light and easy and only give you a few action items to apply to your business:
- 1. Look at your P/L reports by the 10th of every month
- 2. Include liquidity goals in your personal life and business life
- 3. Monitor your recurring expenditures every quarter
- 4. Set aside money for quarterly taxes
- 5. Don’t be your accountant’s biggest client
- 6. Reinvest 50% of profit back into your business
- 7. And don’t forget to enjoy your money every once in a while
Commit a little bit of your energy to these action items every month, and your business and financial health will improve dramatically — especially if, like me, you plan on selling your business one day.
Which leads me to the final segment of this Money Talks series —
A long list of questions used by potential investors to value my business and identify its strengths and weaknesses.
Financial Questions Investors Will Ask You
When one of the largest corporations in the world wanted to buy our brand, it forced me to examine our finances closer than I ever had before.
Investors poured over our books, asking me questions I had never considered, and it really helped me understand where the money goes and how to use it better.
So in a way, these questions inspired this series, and this section is what I’ve been building to all along.
This isn’t just stuff that private equity folks and your account need to know…
These questions are tools to better understand your business and capitalize on areas you might not even know exist.
Whether you’re looking to sell your business now or in the future, knowing the answers to these questions will help you:
1. Stop losing money in areas of your business that don’t create revenue2. Start generating more value from your most profitable channels
2. Start generating more value from your most profitable channels
Both of which will help you create a stronger and more sustainable operation with a lot more room to grow.
So, it’s worth skimming over these to see if you can pull similar data for your business…
And if you don’t have the answers to these questions, then you should find an accountant or financial strategist who can help you get them.
Long List of Investor’s Questions:
- 1. What is the performance by product for 2015 – 2018?
a. What is the net revenue by product?
- b. What was the price per product (per year)?
- c. How many units sold per product (per year)?
- 2. Provide full income & cash flow statements / balance sheets for 2015 – 2018.
- 3. For employees, provide location, salary and status (part time / full time)
- a. For part time employees indicate capacity to take on additional projects
- 4. What is your 2019 forecast and budget?
- 5. Compare the performance vs. budget for 2016 – 2018, if available.
- 6. What is the cost of new customer acquisition metrics for 2015 – 2018 on a monthly basis?
- 7. Based on trending, where do you anticipate the cost of new customer acquisition to be for 2019 and in future years?
- 8. Provide detail on your relationship with your manufacturers.
- 9. What is the summary of your biggest challenges to growth and areas that you think you could benefit from a relationship with us (the investors)?
And then they asked some additional questions about brand engagement and how we calculated our data:
- 1. Of all your Facebook followers, how many are active in ecommerce (have made purchases in the last 12 months)?
- a. How many are active in conversation (have engaged with your brand’s content in the last 12 months)?
- 2. What is the trend in this data (data from the last 12 months vs. the 12 months prior for both stats)?
- 3. What customer loyalty statistics would you guide us to in our assessment? How can we best understand customer loyalty for your brand?
- 4. How is repeat purchase calculated?
- a. If a customer purchases anything from your brand again, what is the specific repurchase rate on the top 10 SKUs (e.g. same customer purchasing the same product within a 9 month period)?
- 5. What is your brand positioning?
- a. Tell us about your brand’s customer profile and competition.
- 6. What is the need gap that your brand fills for its customers today?
- 7. What other skincare/cosmetics brands do your customers use?
- 8. How does your brand keep a pulse on its customer demands through R&D?
- 9. Where is the best data for us to look at to understand customer acquisition and customer lifetime value?
In the end, we didn’t accept the deal. The main reason being that venture capital and private equity is only motivated by one thing: net margin.
They have to pay their shareholders and their investors, and I’m not interested in having my sole motivation be money, nor do I want to answer to someone whose sole motivation is money.
(Which, by the way, I don’t think is a wrong choice. It just wasn’t right for us.)
And even though we decided not to sell, I’m super grateful for the experience because it gave me the opportunity to study wealth and improve how we manage our money.
Hopefully, the lessons I shared in this series have helped you do the same.
Thanks for reading!