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Taking risks and making mistakes is just part of the process when building a business or leading a team. That’s part of the fun of it. Learning through experiences (good and bad), failing forward and growing along the way is what business building is all about.
During my tenure in business, three of the biggest mistakes I see leaders make revolve around time, money and people.
Leaders make the mistake of not using their time wisely. They don’t measure their days in minutes and push off until tomorrow what they should focus on today.
They don’t hold their team members to high standards of productivity. And they often take too long to leverage, which leads to more mistakes with money and people.
Leaders make the mistake of not investing in the people or not investing in the right people at the right time. They are not willing to make the tough decisions around talent.
And some leaders are not leading themselves first, which means they have a challenging time attracting talent or leading others.
Leaders make the mistake of not investing wisely in people or systems. They don’t hold their money accountable. They think investing in a new company or venture will solve the profitability problem in their current businesses. And leaders often aren’t looking at their numbers regularly, nor do they even know what their target numbers are.
Alright, now that we have that out of the way, let’s talk about what leaders can do to mitigate these mistakes and create a solid financial foundation for themselves and their companies.
1. Create your future self
You can be anywhere you want to be in three years or 30 years. The possibilities are endless. It’s your life, and you control your destiny.
What do you want your life and business to look like? How many hours a week do you work? How much cash do you have in the bank? What activities do you do with your family? How many vacations do you take a year? How much money do you donate annually? What does your spiritual practice look like? How many businesses have you created?
We must start with the end in mind when determining our financial future. Perhaps time freedom is more important than a specific annual income for you. Or the work you are most passionate about might necessitate a particular time commitment for you but pays off with bonus incentives.
Or perhaps you find out you need a lot less money to live a meaningful life. All of this is good to know before you get started building a business.
After all, money is a tool, a tool that can fund your ideal life. Step 1: Determine what that ideal life is for you. If you don’t have a number in mind, then the game never ends.
2. Determine your fixed expenses, and live below your means
When is the last time you completed a personal financial statement? Have you run a P&L for your business? If you haven’t already, this is a great place to start.
First, make sure you have separate personal and business accounts.
On the personal side, how do your expenses look? Is there anything you can cut or eliminate? What are your fixed expenses each month? Do the same thing for your business. And then commit to living below your means.
3. Create your buckets
In addition to your fixed monthly expenses, you also want to consider creating four additional buckets of money where your income will flow.
Taxes, of course, is a big one. You want to make sure you are setting aside 25-30 percent of your income for taxes. If you don’t already have an emergency fund (a minimum of six months of personal living expenses), get started on creating one now. And that goes for your business too.
Do you have six months of reserves, or are you spending all you make on the business or funding your lifestyle?
Next, make sure you are setting aside a percentage of your income for investing (more to come on that), as well as for fun (this is where you will save up to make those lifestyle purchases).
4. Get clear on your number, and pay yourself a salary
Once you understand what you want your life to look like, figure out an annual income number that works for you and your family. Let’s call it $100,000.
As CEO of your company, $100,000 is probably an equitable salary for running the business. Just think, if you had to replace yourself, would you be willing to pay $100,000 for the work you’re doing and its results? If not, you might need to rethink the salary for the “position” you hold in your company.
That doesn’t mean that there isn’t additional wealth created for the team or you. It just means that any extra net income from the team should be invested wisely or reinvested into the business — if you are looking to build a business rather than have a high-paying job. Both are fine; you need to decide what you want. The decisions you make around the money flowing in and out of your business will stem from this core decision.
Many times I see real estate professionals become dependent on their income. And when they decide to start building a team and businesses, it becomes tough to give up that income to hire other team members or invest in systems that will help the business grow.
If you determine your “salary” from the beginning of your career and business and commit to living below your means instead, you’ll have many more options and be able to become your future self faster.
5. Review your financials weekly (or daily)
Numbers don’t lie. It’s the stories we create about the numbers that can trip us up. But if you are looking at your personal financial statement, personal and business bank accounts, and net worth calculator at minimum weekly, you will be well on your way to making better decisions. Half the battle is having financial visibility into your business.
Where can you save money? Are you hitting profit margins? Are marketing expenses starting to creep up? Is there enough profit to invest in a new team member? Regularly reviewing your financials will help you determine the answer.
6. Pay off (some) debt
Not all debt is bad! Sure, high-interest credit card purchases on a boat, Manolos, or a European vacation might not be the wisest choice. Pay those off first. And if you’ve committed to living below your means, this shouldn’t happen again.
Or you would save for these purchases in the future. I think we all understand those basic principles. You should pay off that sort of consumer debt.
Now, some debt when it comes to business is not bad, for example, obtaining a loan for farm equipment to increase productivity. Real estate, which often requires debt, is usually a good use of it, as long as you have done your due diligence. Customer relationship management systems that cost $100,000 but make you more productive and increase the speed at which you will gain a return could also be a good use of debt.
The key here is to be strategic about the debt you incur and then hold your money accountable for providing a return.
7. Invest the rest
Whether you want to continue to reinvest into your business via people and systems or choose to invest in mutual funds, new business ventures, bitcoin or real estate, it’s critical to invest.
Once your fixed monthly expenses are covered, and you’ve determined what you need to live your ideal life, invest the rest. If you genuinely want to build wealth and financial freedom through business, taking money off the table and investing is the way to go.
8. Surround yourself with experts
Although this is the last tip, it’s probably the most important: Surround yourself with people who are more financially intelligent than you. I recommend having a great financial adviser, attorney and accountant who you can count on to know the latest tax credits, new investment opportunities, high-performing funds, tax credits and more.
Sometimes, you don’t know what you don’t know, and these experts will help guide you.
These tips are a great place to start, but if you want to build wealth and create a solid financial future for yourself, remember these two things:
- Managing your personal and business finances is not a one-and-done activity. You have to understand what the numbers are telling you. You have to dive in and decide to learn more about money, the economy and wealth-building strategies. Committing to being a lifelong learner when it comes to financials will pay off.
- Remember why you are doing it in the first place. Why do you want to learn financial tips? Why do you want to build wealth? If you keep your future self in mind as your North Star, your navigation, it will guide you toward the life and financial future you desire.
Writer’s note: Adam Hergenrother is not a financial adviser but rather a team leader and brokerage owner offering advice from his experience. Consult with an adviser before making financial decisions.
Adam Hergenrother is the founder and CEO of Adam Hergenrother Companies