When it comes to making financial decisions in your business, there's a right way and a wrong way.
This issue centers around a thre-step process that most entrepreneurs go through, but you won't have to after reading this article. However, before we get to that, first picture this scenario you have no doubt found yourself in many times before:
- You're on a sales call with someone, and you're ready to invest in your business.
- After illuminating your pain, the other person says it will cost you $10,000.
- You say you will think about it and let him or her know tomorrow.
- You leave the call and ask yourself whether this is a worthy investment.
- You decide it is, but you're not 100 percent sure so you check your bank balance.
- You then check your projection sheet for how much you will make in the next 30 days.
- Finally ... you let your gut make your decision for you!
Depending how you feel on this particular day determines whether you say yes or no, and although your "gut" may often be right, letting it make your decisions for you has nothing to do with making the "right" decision."
And it's this where your biggest issue lies.
The biggest financial mistake an entrepreneur makes is that they make emotional decisions. You go through a situation like the one above, and then follow the three-step process where you look at:
1. How much money is in your bank account
2. How much money is coming into your business during the next 30 days
3. How you're feeling at that moment in time
From this, you make your decision. Sometimes it turns out to be a dumb decision, and sometimes it turns out to be a good decision. The problem is, so long as you base your decision on these three pieces of information, you leave much of the outcome to chance.
This often means you spend money when you don't have to, and don't spend it when you should.
This results in short-term thinking, short-term hustling and short-term business building that stops you from scaling to the levels you could (and should). All because you make emotional financial decisions instead of rational and correct ones.
Here's how to achieve financial success
If you want to know how to achieve financial success, the answer is simple ... make good decisions.
Until you do, you will base your success on chance. This is not what successful entrepreneurs do. Successful entrepreneurs remove their emotions from the decision-making process, and instead have a clear understanding of their financial projections and their lead generation. It's vital you have a clear understanding of both of these.
You cannot base your decisions only on the money you will bring in over the next 30 days. Your financial projections need to go beyond this, so you can appreciate what's coming in over the next 60 days, 90 days and beyond.
It isn't to say your short-term cash situation isn't important, but it isn't the only thing you should understand and look at. You need to think bigger and longer, because short-term thinking tends to lead to minimal growth.
As well as your financial projections, you need a clearunderstanding of your lead generation, and how long it takes to turn a new lead into a customer (as well as what this new customer is worth). Lead generation is the lifeblood of your business, and the better you understand who is coming in and how long it takes them to become a customer, the better decisions you can make.
Together, these two pieces of information (financial projections and lead generation) allow you to make rational decisions based on what you can afford, when you can afford it, and whether it's worth your investment.
Your gut still has a say, but it's no longer the loudest voice.
Stop treating your business like a trip to Las Vegas
So long as you make emotional financial decisions, you treat your business like a trip to Las Vegas. You leave things to chance and hope for the best, meaning it's unlikely you'll scale from six to seven figures.
Instead of trusting your gut, trust your financial sheet and projections. Instead of looking at your bank account, look at your ability to generate leads and money. Do this and you'll evolve from a scarcity mindset into an abundant one. You will soon realize the impact you can create and the money you can make, and begin to invest in what you need to, instead of what you think you need to on any given day.
Good financial decision-making is fundamental to you scaling from six to seven figures, so take charge now before it takes charge of you.
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This article originally appeared on Entrepreneur.com. Minor edits have been done by the Entrepreneur.com.ph editors