In recently had the opportunity to interview small business coach Steven M. Hughes about the struggles the small business owners he works with often face. He shares strategies for managing cash flow, taxes and when to pay yourself.
I’m Gerri Detweiler, Education Director for Nav, and joining me is Steven Hughes. Steven is a small business coach. So tell me a little bit about what you do to help small business owners.
Small business owners that have a service-based business, they come to me when they have, maybe, a cash flow problem, and they want to increase their sales, or they want to develop their business and grow, or if they have a problem trying to really navigate the world of finding their target market. Then I help them with that and kind of push them through the waters so they can actually make the money that they want to make and look like the stars that they are.
So cash flow, you mentioned that, is that one of the top financial challenges you see with small businesses?
I believe cash flow is a problem with small businesses, but I think that’s a symptom of the problem.
The root of the problem is having confidence with your product or selling to the right target market. Sometimes people feel like they’re selling to everyone, and when you’re selling to everyone, you’re selling to no one. So that’s hard to generate revenue or scale that way. And so, I think that when it comes to, especially, service-based businesses, that once they identify their target market and can really hone in on who they’re talking to, that things kind of grow from there.
I know a lot of businesses, when they struggle with cash flow, part of the reason is they don’t always get paid for what they do up front. So you’re a freelance consultant or a writer or a graphic designer, and maybe you get paid a deposit, but then you have to get paid the rest later. What do you say to small business owners who may be in that situation and are doing work but not getting paid for it right away?
Yeah. That’s a tough situation to be in. When it comes to waiting on the check to hit the mailbox or hit your PayPal account, that’s a tough situation. But when it comes to managing your money, as an entrepreneur or a freelancer, graphic designers, writers, as long as you manage your money and put 50% of your money to the side for your owner’s pay, let’s say.
I use a profit-first formula. There’s a great business book that kind of takes the guesswork out of your business finances, and that’s what my clients and I use. But 50% of your owner’s pay kind of goes to the side so that you don’t run into those ruts and saying, “Oh. I’m waiting for this check,” or “I’m waiting for the deposit.” It makes things a little bit easier when you’re moving from month to month.
And so that brings up something, also related to that 50%, which is setting aside money for taxes. Do you see that happening with small business owners?
I do. And taxes are a huge issue for small business owners, you probably know. With taxes, there’s also a formula for that. So 15% of your revenue, your income, goes to taxes. And by all means, you should have a tax professional that you check in with quarterly just to say, “Hey. Am I on the right track when it comes to my taxes, so I’m not waiting for a big surprise next year?”
At Nav, we did a survey of small business owners, and we found out that there’s a good chunk, probably 10 to 15 percent who don’t have a business bank account, and they’re not really separating their business and personal finances. Do you run into that and what do you recommend?
There’s all types of commingling going on when it comes to money, and that’s dangerous.
On the liability side, when it comes to running a business, when you’re commingling funds, then things can go awry down the road. And so I know that a lot of small business owners when they’re starting out, they almost use Paypal or services like that as their bank account. Well, those are not FDIC-insured. There’s no way that you can really use that as your business bank account. So I do run into that, but I always tell small business owners that you want things as separate as possible so that you can clearly see whose money is whose. You want your money to be separate from the business’s money so that as you grow, there’s no question on how you’re growing.
But here’s the thing that I find, that a lot of small business owners think, “Well, I don’t have to do that stuff until I’m making real money.” And then—
I see that too. And if you get into the habit of starting at the beginning, then you’re fine as you scale and you grow. But if you don’t think that you need to do that until you, maybe, hit a milestone mark of $10,000 in revenue a month, it’s too late [laughter]. You’ve already done a lot of damage when it comes to managing the money on the front side that you need to go back and correct. So to prevent a lot of work on the backend, go ahead and do it on the frontend and you’ll be good to go.
Yeah. Now, what about business owners in debt? Do you talk to business owners who are struggling with debt problems?
I do. Yes. And some business owners take on debt to finance the business, to grow their revenue. And that’s the tricky subject. When it comes to bringing on equipment or adding more skills to your repertoire so you can grow your revenue, it’s a balancing act.
But when it comes to handling debt, I think that as long as you have a plan for your personal income, so outside of the business, that you know, “This is the debt that I’m going to destroy. That’s my personal debt,” and you also– the business pay for the debt, that it is growing as well, so that you still are separating your finance, but you have a strategy on how you’re going to attack that debt.
At what stage do you tell a small business owner to start paying themselves? I mean, what stage do you say, “Okay. Plow all your money back to grow the business,” and when do you start paying yourself?
I tell small business owners, freelancers, entrepreneurs that you should pay yourself on the first day, because it’s so hard to grow a business when you are eating ramen noodles and the lights or water may be cut off at home, and you’re holding on to the dream that you’re going to grow something really big. If you don’t start seeing some revenue coming in and separating that to say, “This is my income,” then it also doesn’t give you the confidence and capability to say, “Hey. I’m actually making money here.”
A lot of entrepreneurs or freelancers see the money coming into their account, but it goes right back out because of all the things they’ve racked up in expenses or debt. And if you get into the habit of paying yourself first– we talked about that in personal finance too, paying yourself first as far as savings, but paying yourself first as far as your business, then you’re going to be a mindset of, “This is my business. I’m going to grow it.” And you’re going to have an incentive to grow it because you’re going to get paid more.
Any other financial tips that you think are really essential for a small business owner to know?
I think that the big thing is putting the bullseye in front of the target, and by that, I mean really setting your financial goal. Some small business owners or entrepreneurs, they just want to get started, they’re passionate about what they’re doing, and they want to see things grow, but they don’t know where they’re trying to go. And so setting those financial goals, whether it’s revenue or income or profit or getting rid of debt at the end of the day, helps you continue to have the cart around the horse so you can run the race and grow your business.
That’s great advice. And thanks for all you’re doing to help small business owners continue and grow. I think we share a common mission with Nav that we want to see small business owners be successful. So Steven Hughes, small business consultant, do you want to give out your website?
And I love what you all are doing at Na v, so I’m glad I got a chance to sit down with you.
Thank you. My pleasure.
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Credit expert Gerri Detweiler is education director for Nav. She has more than three decades of experience in consumer credit education, has been interviewed in more than 3500 news stories, and answered over 10,000 credit questions online. Her articles have been widely syndicated on sites such as MSN, Forbes, and MarketWatch. She is the author or coauthor of five books, including Finance Your Own Business: Get on the Financing Fast Track. She has testified before Congress on consumer credit legislation.