We sat across a restaurant booth from each other and he said, “Why don’t you move to Ohio and start your own business”. The year was 1992 and that’s how my journey from a corporate employee to a business owner began.

I never thought I could own my own company. What did I know about business? I knew about IBM mainframes. I understood terms like IPL, JCL, Assembler, COBOL, VSAM, VTAM, EBCDIC and CICS. I was a mainframe systems programmer. We didn’t have to talk to anyone at our company but our supervisor and the IBM CE and SE.

This was going to be a big leap. And it was.

If you own a small software company, you probably have a similar story. You didn’t start thinking about entrepreneurship in grade school. You probably stumbled into it like I did. In this series of posts I want to go over some of the things that I’ve learned the hard way about business finances, software marketing and sales and productivity.

Software Company Finance – Lessons Learned

Business finance was not my cup of tea. I spent most of my time developing the software product because that’s what I loved doing. I would put off talking about finances until the end of the year when I had to talk to the accountant. I really didn’t even talk about them with my wife which for the guys in the room, that is a no-no. Even though she might act uninterested in your business and personal finances you should still discuss them with her.

At first the finances were nothing to look at. I didn’t have any so there was nothing to look at. And looking at them just depressed me so I didn’t.

You know it is when you get sick after eating a hot dog or pizza and then you don’t want to eat hot dogs or pizza for a while? That’s the way I was with finances. Every time I looked at my finances in the early years, I would get a sick feeling to my stomach. Then later on, I still didn’t look because in my subconscious I remembered those bad feelings.

Later on things were going well and I always had money in the checking account so I thought there was no need to fret over the finances, so I didn’t.

That’s certainly no way to run a business, so here’s what I learned you need to do in the area of finances.

Cash is King

Everybody know that, right? If there’s anything that is the lifeblood of a business, it’s cash.

The more the better. But how do you keep track of cash? Here’s an easy hack that should be available to everyone.

Sure, you can look at cash flow statements and forecasts, and you should, but the easiest way to keep a handle on cash is have your cash balances put in front of you every day.

Most banks will let you set up alerts for your checking accounts and a daily balance alert is usually one of them. Here is what the alert setup form looks like at my bank.

There’s no reason to not know what your current cash balance is every day.

Profit is King

Not only is cash king in a business, there is also a co-ruler of the business, and that is profit. If your business is just at break-even, it may be providing a great living for you and your employees, but you are just one bad quarter from having problems.

How is profit calculated?

We’ve all been taught that profit is calculated like this:

Revenue – Expenses = Profit

That is the generally accepted method of calculating profit and it’s correct, but the problem with this calculation is that profit is an afterthought. You bring in all the revenue you can and spend what you need to and what is left over is any profit for the business.

A better way to calculate profit is to determine the profit percentage you want to make and then to change the calculation to this:

Revenue – Profit = Expenses

What this does is to shine the light on your expenses.

We’ll talk about expenses in a minute so let’s first discuss profit. What is a good profit percentage for a business? The profit percentage is calculated like this:

Profit / Revenue = Profit Percentage

For example, if your business does $550,000 in revenue and you have $475,000 in expenses you end up with $75,000 in profit.

$75,000 / $550,000 = 13.6% Profit Percentage

So to make this way of handling profit work, you need to decide what profit percentage you’re going to shoot for and then either increase your revenue or cut your expenses to achieve that percentage profit.

Hopefully you’re always trying to increase revenue, but what about cutting expenses? It’s amazing what you can find if you just look at your credit card statements. Most of us subscribe to several different applications like training websites, design sites, stock photo sites, support app sites and more. When you look at your statements many times you’ll notice subscriptions that keep getting charged every month that you’ve forgotten about.

When I went through our expenses I was able to identify 5 subscriptions that we really didn’t need that totaled up to $4,360 for the year. I also identified a training program that I could cut for $1,500. There were also 2 conferences that I decided we wouldn’t attend the next year that totaled $5,375.  That’s a total savings of $11,325 that could be added back to the bottom line. I then decided to discontinue an accounting service that we were using and paid $6,000 a year for. Now we’re up to $17,325 added to our profit.

I was really surprised how easy it was.

One of the traps you fall into as a business owner if you’re not keeping track of cash and profit is to reward yourself with lots of small perks and trips that you don’t need. 

Keep an eye on your profits and make adjustments.