The CFO and Pools of Cash: Solopreneur Insights, Vol. 4
In this part of the series, I'll break down the CFO role and how to manage money: the lifeblood of your business.
After 20 years working in my profession, I can predict who will succeed based on how serious they take their financial management. Most people enjoy financials about as much as they enjoy janitorial work. They want to get to their craft and serve their customers. But, don't be fooled: without sound financial management, there will be no business. It's as critical as any other function.
If you're one of those who throws up a little at the mention of finances, do what I do: Buy a kiddie pool, fill it with cash, then sit in that as you perform the tasks below. If you get bored, grab a handful of cash and chuck it in the air. Suddenly, managing finances is much more tolerable. Whatever works, right?
Getting your money right: The Chief Financial Officer
The CFO's primary roles:
Manage the books
Know my Key Performance Indicators (KPIs)
Cashflow and projections
Manage taxes and filings with CPA
Manage the books
Using software like Quickbooks or Freshbooks is non-negotiable. As soon as possible, use one of these tools to manage and understand your financial situation. I know they charge what amounts to extortion for their subscriptions. It doesn't matter. They still pay for themselves.
I use Quickbooks for all kinds of in-depth assessment, but there are a few that are consistently important:
Balances
I manage all bank account, savings account, and credit cards from Quickbooks. At this point in my career, I rarely look at these. But, early on, I paid constant attention to these balances when assessing my cash situation. Build and maintain a healthy operating balance in your checking account, target six months of savings, and pay off credit cards each month.
Customers
All of my customers are entered into Quickbooks. I can invoice them directly from there, track how much they've spent with me, and categorize each individual project under them. It's a huge time-saver, especially when I later run customer reports. Speaking of reports...
Key Reports (P&L, Balance Sheet, Customer data)
Your Profit & Loss statement is the most basic report. It shows you where your money comes from and where it goes. It then shows you the cash left over. Use it to see your most significant sources of income and to manage your expenses. Remember: Profits are key to your success.
A Balance Sheet shows the overall value of your business over time. In general, you want this balance to steadily grow. Think of it as a Financial Health Report for your business.
By tracking all your customers, you can quickly assess who's the the most profitable. When you also track time associated with each customer, you'll have a clear idea of what type of clients to seek and what type of clients need to go. This sort of data is critical when thinking strategically.
Billing
Most business today is done with electronic billing. I create invoices, then send them to the client for payment. There's no easier way to bill your customers and tie it all back to your core data.
Accounts Receivable
Some of you will have clients that pay up front immediately. Most corporate clients pay on a Net 30 or even Net 60 basis. This means you send the invoice, and they'll pay you in 30 or 60 days. The Accounts Receivable register shows you the amount of money "on the way" to you. This is critical for helping you manage your cash flow and outstanding billings.
Easy for my CPA
If you don't already have one, you need a CPA. More on this below. Your CPA can access your financial software to guide you and to prepare taxes and filings. It saves tons of time and promotes accuracy.
Know my Key Performance Indicators (KPI)
People love to throw the term "KPI" around. I guess acronyms are fun to say and make you feel part of the Cool Kid Club. Whatever. But, KPIs really are an important part of running your Solo business. Here are the most important KPIs to understand and manage.
Budget
You can't possibly gauge the financial health of your business if you don't know the budget. For the Solopreneur, this means also knowing your personal budget. Set up your budgets, people! There are countless resources for this online. Tools like Quickbooks and Freshbooks will help you do this for the business side.
Break-even
Your budget will reveal your break-even. This is the absolute rock-bottom amount you need to make per month in order to avoid going into debt. Know this figure, then double it. You now have your initial monthly sales target. Don't forget to include irregular expenses, like taxes, gifts, and unexpected costs.
Hourly rate
"What!? Are you saying to work hourly!?" No, my friend. Do not work hourly. BUT... there's no moment when you cannot calculate how much you're physically making per hour. Track your time. The minimum segments in your business are: billable time and non-billable time. Then, you simply divide your revenue by the hours you worked to determine your billable rate. Why is this important? Because you're not just working for money. You're also working for time. Your hourly rate will show you your most lucrative tasks and where you need to improve efficiencies. Your ultimate goal will be to increase this rate as high as possible.
Cash Flow and Projections
As the CFO, you're going to want to keep track of your Cash Flow and Projections, lest you want to go into debt, dip into savings, or—God forbid—need to use the cash in your kiddie pool. These two categories help you understand your current and near-future cash situations.
Cash Flow
Cash flow is the measure of money coming in and the money going out. It's like profit and loss, but within a time frame. You need to make sure you have more money flowing in than is flowing out. Most of the time, this is considered on a monthly basis. But, it's really best to think about it per quarter.
Projections
It's critical that you manage your projected client work. First, it helps you better predict your cash flow. Second, it helps you schedule your commitments. If you overbook yourself, you're in just as much trouble as when you have too little work. I keep track of all client obligations in the pipeline, as well as any that are currently being negotiated. I use a spreadsheet where I track all current and prospective client projects, amounts, and anticipated start dates.
Manage Taxes and Filings with CPA
As I mentioned before, a CPA is non-negotiable once you're serious about running your business. My CPA handles all of my tax preparation and filing, property tax filings, payroll, and general financial guidance based on my situation. A good CPA stays up-to-date on all the latest rules and regulations, and works to put you in the best-possible spot financially. If you don't have one, ask business peers who are ahead of you for recommendations. Look for a CPA that knows your particular industry and who is known to be reliable.
These few items will get you up and running in your CFO role. Ultimately, there's a lot more to learn about financial assessments and strategies. I'll save those for some future articles. For now, this will cover your bases.
Here’s my total time breakdown for the CFO role:
Yearly: 8 days
2 days per year for tax prep and correspondence with CPA
1/2 day per month to update Quickbooks, review KPIs, update projections
– Torrey
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