10. Your relationship with money as a business owner

Oct 2

Welcome back to The Accounting Edit Podcast.
I'm Leah McCool with Orca Accounting.
And I'm Aminder Mann with Sequoia CPA.
Thank you for joining us again with another episode.
This one is titled Your Relationship with Money as a Business Owner.
And this is, we think, kind of a buzzwordy sort of topic that typically dives into your psychology when it comes to your relationship with money.
But we thought that this was a great episode because every business has its own trajectory and growth plan and status when it is looking at scaling or just, you know, going from those early stages to becoming a fully fledged company.
So this episode is really just going to talk about our thoughts of it coming from a business owner perspective.
We have an accounting background, so our approach to this relationship with money as a business owner and just things that we have in mind as we navigate this business growth journey.
Yeah, Leah, just diving in here, I think there's this idea of when you're starting off your business, you're looking at how to grow your business, and there's different avenues you can really take.
You can start with more slower growth, scale it up, or you can take more of a rapid growth approach where you're investing a lot upfront and trying to leverage as much as you can and ensure that you have growth that will eventually catch up with your spend.
What kind of approach have you taken so far to your own business?
So with my business, I coming from a small business background and I have never really grown up with the comfortability of taking on a lot of debt or having investors, that sort of thing.
And so my approach is definitely more risk-averse.
I have really just started with a really lean start-up.
And just kind of for some personal background, I was starting my business and my husband was starting law school.
And so this was really, I wanted to take as lean of an approach as I could, given my personal financial situation.
And so immediately jumping into just trying to get a small business loan or any sort of financing was more scary to me than actually thinking I could get a really lean start-up and see what I could make work.
And so that has been really from the beginning, my approach.
And that idea of frugality has only stayed with me through my business growth.
And so I definitely really feel comfortable with the slow growth, or not even slow, but just, I guess, slower than trying to just make my business grow as fast as possible.
That just mindset hasn't been one where I have been really needing.
And so therefore, I really love taking advantage of just the more slower, more organic growth, getting, being choosier with the clients that I do take on.
And ultimately, just seeing what growth happens organically and how I can kind of just extend the life of that and make that sustainable as I continue to scale.
So it's been definitely something that fits me really well, I think.
That's amazing.
Yeah.
I think it's really fascinating when you look at different business owners, different approaches, there's no right or wrong.
It's just, like you said, the psychology that we bring around money to all these different approaches.
They all can be profitable.
They can all lead to great success, but it's just different reasoning behind why we choose to do the things we do with our own business and money.
Yeah, absolutely.
Like you said, there's so many different paths to profitability and growth.
And just this topic of, you know, are you more, do you, does slower growth feel more in alignment with where you're at in your life, in your business?
And but then also there are so many people that the idea of rapid growth investors and everything is much more intuitive and it just feels more comfortable and sustainable.
And so yeah, so you, Aminder, what would you say now that you are, oh my gosh, eight months into your business, how would you describe your relationship with growth and what do you tend to fall into, whether it's slower growth or more rapid growth?
Yeah, I think I'm definitely also on the slower, more sustainable growth side.
Being part of an immigrant family, frugality was also a big part of my life growing up.
So my mindset around money has always been to be a little bit more conservative, take more calculated approach to money.
Not to say that I don't want profitability, I don't want growth, I don't want success, but I'd rather be more thoughtful in my approach.
So I have been more on the lean side, like you said, a lean startup approach, thinking about my overall expenses, thinking about the approach I want to bring to my clients, the feeling that I want them to feel when they're working with me.
It gives me that flexibility in that sense.
If I was scaling super fast, I feel like I would, there would be so many gaps that I'd have.
Eventually you'd catch up, right?
But I want to build more thoughtfully, sustainably, bring a lot more of who I am into my business, and that can happen when I'm involved with a lot of these processes.
I can experiment a little bit more with what kind of software do I want to use?
What kind of portal experience do I want for my clients?
So those are the kind of things that if you go a little bit slower like I have, you can kind of take that approach of thinking about what is this experience like from the other side versus going super rapid and working from that side.
Eventually, yes, I do want sustainable growth.
I want to grow my business and have it be built into something bigger than where it is now.
But I'm definitely taking more of that sustainable growth like yourself as well.
Yeah, and I think really a lot of it, and we also just our ideas about growth too, because we love that idea.
I think we're both very similar and we like to just try and implement stuff ourselves and figure it out.
It's probably that startup background that we both have, where we just know that we could figure it out.
But I think that also because of that lean startup and just the slower growth as a result, I think that doing it yourself obviously might take a little bit longer, and it might be a little bit more frugal.
Because you're not outsourcing in the beginning, you're doing it all in house.
That's something that definitely as we scale, we'll consider what do we want to outsource?
Do we want to outsource marketing?
Are there other areas of our business where we need help maintaining the actual operations?
That's something where if you do have more money to get started with, then that is something where you could invest in someone building your website, or someone doing your books right from the start, or doing other things where you can invest that money in certain places.
That's just an area where we are excited to scale into that, and I'm definitely excited to scale that way.
But having that insight in the beginning on how to potentially train someone, or have that direction that we want them to go in based on what we already know from starting our businesses and growing it ourselves.
I think, Leah, you mentioned just even on the opposite side of things, is to have that investment upfront.
This is another way of doing business.
There's nothing wrong about it.
It's just a different approach.
It's fascinating that we take more conservative approach, but if you are more taking a active, rapid growth where you're maybe taking some of those small business loans and investing in your business upfront and hiring and adding all those resources quickly, it's a different approach.
The way you look at your finances at that point is a little bit different.
You're going to be tracking your cash flow differently than if you were looking at the way we're doing it in more of a slower growth approach.
It's just fascinating to see that so many different business owners take different approaches and it all really depends on how we grew up around money and how we feel our psychology comes into play when we're looking at making decisions around money.
It's such an important part of our own businesses, but I think it's so important to understand how we relate to it, to then be able to understand how are we then going to make decisions from it.
Yeah, absolutely.
And I think that that ties really great into our next topic of just with the sustainable growth.
What does that even mean?
What does sustainable growth mean to us as business owners and as accountants?
And that's something where in my mind and just how we've talked about the idea of revenue is seen as the actual growth aspect, that's a common metric for growth and how much money, how much revenue you're bringing in.
But the flip side of that is how do you avoid just chasing more and more revenue, more and more revenue, because that is great if you're getting to take home more of it.
But are you actually making more revenue and is that contributing to a higher profit margin?
Or are you just trying to make more and more because you have more and more expenses to cover?
And so your business might be doing more activity, you might be earning more, but then you also might be spending more.
So what is your psychology?
What is your natural tendency to really getting into those situations where can I actually sustainably have this activity level and spending level for my business?
And I think that this is definitely something that is helpful for business owners to really take a look at of what their approach is, what their tendency is, and it's definitely something to think about.
Yeah.
And for me, I really tend to, again, lean on.
I'm looking at sustainable growth in terms of I want to be able to take home a certain amount, but I need to be able to have enough to invest back into my business to provide that growth.
So because I'm doing most things myself right now, I can afford to be able to run a little lean, and I'm looking at what are my expenses really closely, and I look at my revenue generally month to month of how much am I making, how much are my expenses on a monthly basis, and what is my net profit?
And this is kind of the same approach I apply when I'm looking at my client's books.
What's coming in?
What's going out?
What is the net profit?
And what are you taking home?
Because at the end of the day, we run our businesses to be able to provide for ourselves.
Again, there's different approaches.
Some people will go in through that rapid growth and not want to take anything home in the first year and want to invest 100% of it back into the business so that they see this growth out of it.
But you can also take the approach where it's a little bit slower, like us, where we're taking a certain percentage home and then investing a certain percent back into the business to be able to provide that growth.
And for me, that's what sustainable growth feels like, is to be able to cover my expenses, but also have revenue coming in.
And so it's like almost like this flywheel of being able to fuel your own business, that net income at the end of the month is the fuel for next month's growth.
And so using that calculation has been helpful for me to be able to track the growth on my business side.
How about you, Leah?
No, absolutely.
I'm the same way where I, you know, this, our businesses in terms of being service-based businesses, we have a very specific approach to how, like why we started our businesses and what we, what our goals were.
And my goal was to really just make it so that this replaced my corporate salary.
And I think that maybe a lot of solopreneurs or other service-based business owners, this, they started their business for the same reason.
They needed to replace their income that they were earning from a W2 job.
And so that was a huge first goal of mine, was to make enough to be able to take home.
But naturally that there are, like you said, other expenses that are necessary to running the business.
A couple on my end are just accounting software or different sort of Microsoft subscriptions so that I can pay for my Excel spreadsheets and everything.
And there are so many other things that come into expenses that do have a return on our investment, like marketing expenses.
Just the intentionality with those expenses that are not extremely necessary to running, say, the operations of the business, but are necessary for growth.
That's an area of sustainability where it really will be different for everyone based on how much money they want to take out of the business versus how much money they want to reinvest back in.
So everyone's scenario is different.
I think that for people who are in perhaps a different financial situation where they can afford to not take any money out of the business the first year and rather just reinvest all that income into it, I think naturally they'll see a very different growth trajectory in the first couple of years than someone who is using that as their primary source of income for their own life.
But it really does have, like we've said, there's no right answer, but this is just definitely something to think about what your relationship to having that income is and what you do with it at the end of the day.
Yeah.
Something really important you mentioned is around expenses and investing a certain amount into these types of expenses, say it's marketing or software subscriptions.
What I really try to look at, and I try to look at this for my clients as well, is the return on investment.
So ROI.
So if you are investing certain funds back into your business, you're putting it into ads, you're putting it into marketing.
What kind of return are you getting on that money?
You don't want it just to be going into your business, and it becomes this pit where you don't even know what's the return on it.
So being more methodical and analytical, again, as accountants behind the methodology of investing even those funds.
Yes, you're putting it back into your business, but what are you spending that money on?
How are you spending it and what's your returns on it?
I think that's a really important metric to track.
I think sometimes when we think of putting money back into the business, it may just mean, oh, I have X number of dollars sitting in the bank.
You don't want that either.
You wanted to leverage it for growth, if that's what you want.
Some people don't want that growth, right?
They want just a stable, sustainable business.
And that's fine too.
And you just you have a perfect formula of what goes home, what goes into the business and you just cover your expenses.
But we've taken more of the sustainable growth where a certain amount is being put back into certain expenses.
And as the business grows, we have maybe a larger amount that can be invested in, to say marketing or ads or whatever area we choose to invest in.
And again, that's a decision as a business owner that you can choose to make.
So I think it's really important to have that insight.
And it's also a good point to mention that we are service-based business owners, so our startup costs were relatively low.
There are businesses out there where there is a huge startup cost.
So again, this will also change the trajectory of how you spend money in your business, how you relate to taking funds out of your business.
So I feel like it's important to mention that too.
We're service-based.
We have different type of investment up front.
But there's, say, if you're starting a restaurant, you're going to have a huge startup that is totally different, and you're going to need those loans or if you don't have the funds up front to be able to invest.
And then your approach becomes so different in terms of growth on your business side.
Yeah, and the huge part of it that just with having, just the nature of the different types of businesses that people start, at the end of the day, people typically will do research for taking out loans or anything like that, depending on the type of business that you're starting.
So your level of familiarity with the industry, what is typically needed to start a certain type of business, say you have a storefront and you need to do significant buildouts or different permitting.
I mean, naturally, all different types of businesses will have different startup costs.
And so it will really just be a question of how much money do you need to get started?
And then therefore, where is that money going to come from?
Is that going to come self-funded?
Aminder mentioned we're service-based, so we were able to have a very lean startup.
But definitely, if money has to come from somewhere and you need a significant amount to get started, then are you taking out loans?
Are you taking on investors?
And this is something where not only will having proper accounting records be extremely important, but then also having those recurring records be important to whoever your, those third parties are.
These are the third parties that we talk about who will be interested in what your business activities are, a month, a couple months, years down the line, so that they have eyes on what you are using their money for and if they're going to get that money back, basically.
And that is obviously a lot of, that can get stressful and there can be a lot of pressure there.
And that just really ties into what your relationship with money is.
Are you comfortable taking on debt?
Are you responsible with that debt?
Are you, do you have a plan in place on how to really have that sustainably work with your business as you start it?
So all things to consider when it comes to starting a business of your own.
Those are really good points you mentioned there, Leah, I think.
And it's fascinating how each of us grew up differently around money and the choices we make with money really depend on our experiences through that.
Yeah, absolutely.
And the last topic that we'll cover is just how, I mean, it kind of goes hand in hand with just running lean.
And ultimately, as we talk about avoiding the rat race of making enough money to just cover your expenses, on the flip side of that is how actually running lean in the beginning, even if you are a business owner that has more capital to start with, or you have a higher volume and maybe you're growing faster, regardless of the growth rate, if you're running lean and you're running more frugal, this can actually help, this mindset can help you lay a foundation for a higher profit margin going forward.
And ultimately, what this means is just reducing unnecessary expenses as much as possible and using only what you need in order to continue that sustainable growth that we've been talking about.
A huge book that I have read and have, this is kind of a controversial book, so just a disclaimer, but this idea of running lean and really only using what you need out of their expenses.
This came from a book called Profit First by Mike Malkowitz, Malkowitz, something like that.
And so it's definitely a book where if you are a new business owner, you're just wondering about this idea of having different buckets allocated for certain parts of your business that are a result of your income.
Just figuring out where you want those buckets to be for how you run your business.
This is definitely a good resource for at least understanding how profit versus expenses versus income kind of relate.
But definitely not something that we recommend taking every single idea from, but it's just something that is thought-provoking and something that we both have read or are planning to read.
Yeah.
I think that's a really great thing you mentioned, Leah.
On the net profit margin or higher profit margins, it is an approach that I also take in my business is really looking at the bottom line and making sure that I have enough revenue to cover the expenses is an approach I take.
Because at the end of the day, I want that sustainable growth.
I want to be able to take home money and I take that same approach when I look at my client's books is, what are those categories that are the highest spend and then how can they be reduced and regularly evaluating those expenses and cutting back, I think is a huge first step to be able to control the levers on your business.
So I always recommend looking at that for my clients.
That book is on my read list for next month, so I will be happy to share more thoughts on it in our upcoming episodes.
Absolutely.
Just to recap this episode, your relationship with money as a business owner, it all is very personal.
It all comes from our own backgrounds and our own stories.
The first topic was the idea of slower growth versus rapid growth.
This really has background in whether you're more risk-averse or risk-tolerant in your experience with growth, what sustainable growth means in terms of revenue and having enough to not only cover expenses, but then also just continue growing at a sustainable rate, but then also covering the topic of profit first, running lean and how that lays a foundation for higher profit margins and more healthy ratio of expenses going forward.
So hopefully you found this episode super helpful and insightful on the relationship with money and we'll see you next time.
Thank you all for listening.
We'll see you next time.
You've been listening to The Accounting Edit, a podcast by Aminder Man of Sequoia CPA and Leah McCool of Orca Accounting.
And if you're enjoying the show, don't forget to follow us so you don't miss an episode.
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It really helps us out and we'd love to hear what you think.
Does your business need help on the accounting side of things?
We would love to help you.
You can find Aminder at sequoia.cpa.com or on Instagram at Sequoia CPA.
You can find me, Leah, at orcaaccounting.com or on Instagram at Orca Accounting.
We'll be posting new episodes every other week, so be sure to follow so you don't miss out.

Summary

In this episode, Leah and Aminder discuss the intricate relationship business owners have with money, exploring various approaches to growth, the concept of sustainable growth, and the importance of running lean to achieve higher profit margins. They share personal experiences and insights on how their backgrounds influence their financial decisions and strategies for business success.

Takeaways

Every business has its own trajectory and growth plan.There are different avenues for business growth: slow vs. rapid.
A frugal approach can lead to sustainable growth.
Understanding your expenses is crucial for profitability.
Your relationship with money is shaped by your background.
Sustainable growth means balancing revenue and expenses.
Investing in your business should be strategic and calculated.
Running lean can help lay a foundation for higher profit margins.
Revenue growth should not come at the expense of profit.
Your mindset around money influences your business decisions.

Thanks for listening!

— Leah & Aminder

Contact

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