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basic financial planning #2: Do regular "check ups"

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Blog entry by BigTiny posted 03-01-2011 01:47 PM 1293 reads 0 times favorited 9 comments Add to Favorites Watch
« Part 1: Financial planning basics for the woodworking pro. Part 2 of basic financial planning series Part 3: nothing new tonight »

Okay, dear readers, time for part two of my insomnia cure… er… financial planning for the woodworking pro.

You’re rolling now, doing real honest to golly wood work for real, honest to golly customers and getting real, honest to golly money for it. Now what?

Every day you have to do your book entries for the day. If you let yourself fall behind, it will grow into a monster too large to face and you’ll just let it keep growing until it topples your fragile financial house. It’s easy if you keep it up to date. If you don’t, remember what I said about getting to know the tax man far too well?

Another benefit of the daily routine of entering everything is the fact that you can do a bottom line calculation any time you want to, letting you know how healthy (or unhealthy) your business is.

Speaking of which, you should be checking that bottom line once a week. Schedule a time every week, as close to the same time/day as possible, to do a financial “check up” on where you stand. Look for trends and try to figure out what is behind them. If you notice every time you do a couple of widgets in a particular week, the bottom line that week is better that the weeks you didn’t make any widgets, maybe you should be actively promoting your widgets. Conversely, if your bottom line suffers every time you work on a thingumabob, don’t make any more thingumabobs. Get the idea? This is an easier, faster method than doing a time and materials break down on everything you make. (not that the time and materials study isn’t a valuable tool too, it just takes longer).

My point is that it’s very important to keep track of how your business is doing. This helps in planning for the future. It lets you spot things that are benefiting you and things that aren’t so you can focus your time and energy in the areas that will give the best returns.

In the early days, expect a lot of red ink in the totals column. It’s only natural. As long as the red figures are shrinking, you’re on the right road. If they get bigger, it’s time to find out why.

Once the bottom line starts to show up in black ink, you can start to relax a bit. Now it’s time to pay more attention to your second set of books, your personal ones. The first books, the business ones, keep track of the business. Your other set of books keep track of your own finances. All those expenses the tax man doesn’t care about but still have to be paid, such as residential rent or mortgage, food, heat and light for the home, etc. As one of Charles Dickens’ characters once said, “Annual income ten pounds, annual expenditures ten pounds two shillings and sixpence, result? Misery! Annual income ten pounds, annual expenditures nine pounds nineteen shillings and sixpence, result? Happiness!” True then, true now. If your business is in the black but you are in the red, you’re not going to be happy. What can you do to improve this? One of two things (or a combination of the two): reduce the expenditures or increase the income until your personal bottom line is not only in the black but growing.

I know, now you’re going to ask how, right? If I had a universal answer, I’d be a millionaire! (grin) Since my bank manager can tell you I am not a millionaire, we’ll all have to find our own answers to that one. I can, however, offer one little tip.

Do not live beyond your means. If your bottom line is red, you have no business eating anything not prepared at home. You have no business buying anything you don’t absolutely need.

This next point isn’t going to sound like it’s financial, but trust me, it is.

Work full time hours! I don’t care what you’re doing, but do something to do with your business at least eight hours a day. Every day! If you aren’t building something, go out and prospect for customers. Do the books. Sweep the shop floor. Do something. If you get in the habit of taking half the day off because things are slow, you’re putting the skids under your own feet. Get in the habit of working at least full time if you’re serious about the business. If you keep at it full time, and if you’re good at what you do, (and if the Gods are smiling on you), you will succeed.

This next one also won’t sound like financially based, but it too is.

Do the absolute best work you are capable of on every item you make. Believe me, you can’t afford not to! What’s the best advertisement in the world? A happy customer! What’s the worst? An unhappy one! No amount of money can buy the one or make up for the other. One ticked-off customer with a bee in his bonnet can bury a business!

Okay, that’s enough rambling for tonight. Stay tuned for another installment. Same time, same station.

Tonight’s program was brought to you by the letter “L” and the number 2. (grin)

Paul

-- The nicer the nice, the higher the price!



9 comments so far

View Mario's profile

Mario

129 posts in 2861 days


#1 posted 03-01-2011 04:04 PM

Thank you Paul, sound advice, bottom line calculation is definitely a must to keep the shop afloat.

View a1Jim's profile

a1Jim

115202 posts in 3042 days


#2 posted 03-01-2011 06:03 PM

Well done Paul
where were you when I went into business 40 years ago ? :))

-- http://artisticwoodstudio.com Custom furniture

View Eric_S's profile

Eric_S

1551 posts in 2661 days


#3 posted 03-01-2011 07:42 PM

Great advice Paul.

-- - Eric Noblesville, IN

View lanwater's profile

lanwater

3111 posts in 2399 days


#4 posted 03-01-2011 09:14 PM

Paul: I like your advise on working full time hours. I have seen many small business owner showing up latet at work and taking too many unscheduled hollidays just because the commercial say “you deserve it”.

I fully agree that one need to keep their personnal finances apart from the business finances.
The best way to do that is to pay yourself a salary just like you would pay someone else to run your business.
That would insure that you don’t spend your business capital.

Thanks , This an excellent set of blogs.

-- Abbas, Castro Valley, CA

View Div's profile

Div

1653 posts in 2406 days


#5 posted 03-01-2011 10:50 PM

Good advice Paul, thanks.

I think any self employed woodworker who ONLY works 8 hours a day, is not going to make it!

I typically do 10 hours a day in the shop. Many nighttimes I do another hour or 2 behind the computer working on bids or cutting lists or correspondence. Yes, I still enjoy it! How many hours do people waste mindlessly staring at crap on the TV!!

-- Div @ the bottom end of Africa. "A woodworker's sharpest tool should be his mind."

View BigTiny's profile

BigTiny

1676 posts in 2354 days


#6 posted 03-02-2011 02:50 AM

As our good friend Div points out, the 8 hour day is a minimum and you will find yourself doing many more hours than that if you are successful. Indeed, the most successful wood workers coule work 24 hours a day if they wanted and still not get every item they are asked to build completed. they are in the enviable position of being able to pick and chose what they will do and what they won’t.

Oh to be that successful, eh? :)

-- The nicer the nice, the higher the price!

View Div's profile

Div

1653 posts in 2406 days


#7 posted 03-02-2011 10:35 PM

You have to do many hours in order to BECOME successful! Then you have to do many hours to STAY successful! I maintain that 8 hours is not enough ESPECIALLY when you are trying to establish yourself. Pro woodworking is not a job; it is a passion, a lifestyle, a calling, something that gives meaning to your life. The book “Zen and the art of making a living” comes to mind. It should be compulsive reading/study in schools! 8 hour days are for those who want to work for a boss. I write from the perspective of a one man shop.

Sorry Paul, I feel/know strongly about this!

-- Div @ the bottom end of Africa. "A woodworker's sharpest tool should be his mind."

View BigTiny's profile

BigTiny

1676 posts in 2354 days


#8 posted 03-03-2011 01:49 AM

Hi Dive.

My friend, I am not disagreeing with you. I totally agree that more than 8 hours a day are mandatory to success in self employment. My point was that there should always be something to do, and to do something rather than sit around if things are slow. Getting in the habit of doing nothing is a sure road to failure.

I too feel strongly about putting in the hours, and did an average of 10 to 11 hours per day plus a lot of weekend work on top of that. The 40 hour week may work for the 9 to 5 set, but it is death to those of us who take the harder path of self employment.

Friends again? :)

-- The nicer the nice, the higher the price!

View Div's profile

Div

1653 posts in 2406 days


#9 posted 03-03-2011 09:53 PM

He,He, I’m not angry at you :) I’ve silently been enjoying your posts, comments here on LJ’s. I like the way your mind works! Your point is off course a good one, I just wanted to add about the extra hours. :) Anyway, this is supposed to be about finance of which you know much more than me. I am learning things here, keep it up! Thanks for sharing your knowledge Paul.

-- Div @ the bottom end of Africa. "A woodworker's sharpest tool should be his mind."

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