Financial Management for Small Entrepreneurs

Hello, Entrepreneurs! If you’re here, it’s because you want to learn how to better manage your money and turn your products into premium items. And who doesn’t, right? After all, we all want to see our business grow and prosper. So, grab a coffee, sit comfortably, and let’s dive into the world of finance in a light and fun way. Let’s understand Financial Management for small entrepreneurs.

What is Finance?

Finance is a fancy word for how we manage our money. Imagine you are a baker earning U$ 1,000.00 every month. Finance is about how you decide to spend, save, and use that money wisely. Simple, right?

Let’s break it down a bit more:

1. Revenue (Money Coming In)

Revenue is all the money you earn. In the case of Mary, our favorite baker, she earns U$ 1,000.00 per month selling her delicious decorated cookies.

2. Expenses (Money Going Out)

Expenses are all the costs you have. Mary needs to buy ingredients like flour, sugar, eggs, and food coloring. Additionally, she has to pay for electricity, water, and maybe even the rent of the workspace.

3. Planning

Financial planning is how you organize your money to ensure it lasts the whole month and still leaves some to save. Mary makes a plan to know how much she can spend on ingredients, how much she needs to save for fixed expenses, and how much she can invest in new equipment or courses.

Separation of Personal and Business Accounts

Separating personal accounts from business accounts is essential to maintain financial organization and ensure you know exactly how much money you have to spend in each area. Let’s understand why this is so important.

Why Separate Accounts?

Imagine you have a cookie shop and also love buying ice cream. If you mix the money you earn from selling cookies with the money you spend on buying ice cream, it will be a mess! You’ll never know exactly how much money you have to invest in your shop or how much you can spend on ice cream.

Benefits of Separating Accounts

1. Financial Clarity

Separating accounts helps you clearly see how much money is coming in and going out of your business. This makes financial control and decision-making easier.

2. Ease of Management

With separate accounts, it becomes easier to manage the expenses and revenues of your business. You’ll know exactly how much you can invest in new ingredients or equipment.

3. Organization

Keeping personal and business finances separate avoids confusion and errors. You won’t risk spending company money on personal expenses and vice versa.

How to Do This in Practice

Not formalized yet? No problem! You can open two personal accounts in different banks. Nowadays, digital banks make it easy to open accounts at a low cost, making this separation even more accessible.

1. Choose Different Banks

Open an account in one bank for your personal finances and another account in a different bank for your business finances.

2. Clearly Define the Accounts

Decide that Bank A will be for your personal money and Bank B will be for your business money. This way, you’ll always know which account to use for each type of expense.

3. Maintain Discipline

Don’t mix expenses! Use the account in Bank A only for personal expenses, like buying ice cream, and the account in Bank B only for business expenses, like buying ingredients and paying company bills.

Practical Example

Let’s imagine Mary has a lemonade shop and also loves buying ice cream. She decides to open two accounts in different banks:

• Bank A: Mary’s personal account
• Bank B: Mary’s business account

Mary uses the account in Bank A to buy ice cream and other personal expenses. The account in Bank B is used to buy ingredients for the cookies, pay shop bills, and invest in the business. This way, Mary keeps her finances organized and knows exactly how much money she has for each area.

Summary

• Separate Accounts: Helps maintain financial clarity, ease management, and avoid confusion.
• How to Do It: Open two personal accounts in different banks, using one for personal finances and the other for the business.
• Discipline: Use each account only for the defined purpose, keeping finances organized and under control.

Separating personal accounts from business accounts is a simple but extremely effective practice to ensure healthy and organized financial management. With this separation, you’ll have more control over your finances and be able to make more informed decisions for the growth of your business.

Cash Book Model for Small Entrepreneurs

Maintaining efficient financial control is essential for the success of any business, including our baker Mary. One of the simplest and most effective methods for this is the Cash Book. Let’s create a basic model that Mary can use to record all the inflows (money coming in) and outflows (money going out) of her cookie business.

Cash Book Model

Date	Description	Inflows (U$)	Outflows (U$)	Balance (U$)
01/10/2023	Initial Balance			100.00
02/10/2023	Cookie Sales	50.00		150.00
03/10/2023	Purchase of Ingredients		30.00	120.00
05/10/2023	Cookie Sales	70.00		190.00
07/10/2023	Purchase of Packaging		20.00	170.00
10/10/2023	Cookie Sales	60.00		230.00

How to Fill Out the Cash Book

1. Date: Note the date of each transaction.
2. Description: Write a brief description of what happened (e.g., cookie sales, purchase of ingredients).
3. Inflows: Note the amount of money coming in (e.g., money received from sales).
4. Outflows: Note the amount of money going out (e.g., money spent on ingredients).
5. Balance: Update the balance after each transaction by adding the inflows and subtracting the outflows.

Importance of Recording Money Inflows and Outflows

Recording all money inflows and outflows is crucial for any business. Here are some simple reasons to understand why this is so important:

1. Know How Much Money You Have

By recording everything, Mary always knows exactly how much money is available. This helps avoid spending more than she has.

2. Better Planning

With a clear record, Mary can better plan her purchases and investments. For example, she can see if she has enough money to buy more ingredients or if she needs to save more to buy a new oven.

3. Identify Problems

If Mary notices that she is spending too much on ingredients and not earning enough from sales, she can adjust her prices or look for ways to reduce costs.

4. Make Informed Decisions

With all the information recorded, Mary can make smarter decisions about the business. She can decide if it’s time to expand, hire someone, or invest in a cooking course.

5. Facilitate Accounting

Keeping an organized record makes it much easier to do the business’s accounting. If Mary needs to show her finances to a bank or an investor, she will have everything well documented.

6. Avoid Surprises

Without recording inflows and outflows, Mary might end up being surprised by the lack of money to pay important bills. With a record, she can better prepare for the future.

Summary

Maintaining a Cash Book is like having a diary of your business’s money. It helps Mary know exactly how much money she has, where she is spending it, and how she can improve her finances. It’s a simple but very powerful tool to ensure her business continues to grow and prosper.

Costs and Provisions

Now, let’s differentiate between fixed and variable costs. Fixed costs are those you have every month, like rent and internet. Variable costs are those that change, like ingredients for the cookies. And don’t forget about provisions! These are amounts you save every month for future expenses, like vacations and insurance.

Break-Even Point

The break-even point is when the money you earn equals the money you spend. If Mary spends U$ 1,000.00 per month to make her cookies and sells U$ 1,000.00, she is at the break-even point. If she sells more, she has a profit; if she sells less, she has a loss.

Profit and Pró-Labore

What is Profit? Understand in a Simple Way

Profit is the money left over after you pay all the expenses of your business, including your own salary (pró-labore). Let’s use Mary and her cookie shop as an example to understand better.

Example of Profit and Pró-Labore

Mary sells cookies and earns U$ 1,000.00 per month. But she also has expenses, like buying ingredients, packaging, and paying herself for the work she does. Let’s see how this works:

1. Revenue (Money Coming In)

• Mary earns U$ 1,000.00 selling cookies.

2. Expenses (Money Going Out)

• Mary spends U$ 400.00 buying ingredients.
• She spends another U$ 100.00 buying packaging.
• Mary pays herself U$ 300.00 as pró-labore (her salary).

3. Profit Calculation

• Revenue: U$ 1,000.00
• Expenses: U$ 400.00 (ingredients) + U$ 100.00 (packaging) + U$ 300.00 (pró-labore) = U$ 800.00
• Profit: U$ 1,000.00 U$ 800.00 = U$ 200.00

So, Mary’s profit is U$ 200.00. This is the money left over after she pays all the expenses, including her own salary.

What is Pró-Labore?

Pró-labore is like the “salary” Mary pays herself for working in the business. Even though she is the owner, she needs to set aside money to pay herself for the work she does.

Summary

Profit: It’s the money left over after you pay all the expenses of your business, including pró-labore. In Mary’s case, it’s U$ 200.00.

Pró-Labore: It’s the “salary” you pay yourself for the work you do in your business. Mary decides to pay herself U$ 300.00.

Why is it Important?

1. Profit: Knowing the profit helps Mary understand if her business is doing well. If she has a profit, it means she is earning more money than she is spending.
2. Pró-Labore: Setting aside a pró-labore helps Mary ensure she is being paid for the work she does, even if the business is hers. This also helps keep the business’s finances organized.

This way, Mary can continue making delicious cookies, knowing she is taking good care of her money and her work!

Pricing and Added Value

What is Added Value?

Added value is the extra value something gains because of the special work you put into it. It’s like when you make something simple become special with your personal touch.

Let’s imagine Mary makes cookies. She can make simple cookies, which are tasty but common. Now, imagine Mary decides to decorate these cookies with beautiful and personalized designs, like flowers, animals, or cartoon characters. These decorated cookies are more special and worth more than the simple cookies. This “something extra” that Mary adds is the added value.

Why is it Important to Value Labor and Personalization?

1. Recognition of Effort

When Mary decorates the cookies, she is using her time, skill, and creativity. This is hard work and should be recognized and valued.

2. Market Differentiation

Mary’s decorated cookies are unique and different from the simple cookies anyone can make. This makes customers want to buy her cookies, even if they are more expensive.

3. Fair Remuneration

Mary should charge a fair price for the decorated cookies to ensure she is paid for the extra time and effort she puts in. This helps Mary earn more money and continue doing quality work.

Practical Example

Let’s see how this works in practice:

Simple Cookie

• Cost of ingredients: U$ 1.00 per cookie
• Sale price: U$ 2.00 per cookie

Decorated Cookie

• Cost of ingredients: U$ 1.00 per cookie
• Time and effort to decorate: U$ 14.00 per cookie
• Sale price: U$ 15.00 per cookie

Here, the added value is the decoration work that Mary does. She adds U$ 14.00 to the price of the simple cookie to cover the time and effort she puts into the decoration. This makes the decorated cookie cost U$ 15.00.

Summary

Added Value: It’s the extra value something gains because of the special work you put into it.

Importance of Valuing Labor and Personalization:

• Recognition of Effort: Values the time and skill you put into the work.
• Market Differentiation: Makes your product stand out and be more desirable.
• Fair Remuneration: Ensures you are paid fairly for your work.

By valuing labor and personalization, Mary can ensure her decorated cookies are recognized as special and unique, and that she receives fair payment for her hard and creative work.

The Importance of Investing in Growth

It’s worth remembering that the hourly rate of a “senior professional” and a helper or a beginner professional are different. In some cases, to make a profit, it may be more interesting to have a helper or beginner professional to do basic tasks, so you continue to receive the appropriate value for your talent.

An interesting story illustrates this idea well: In a village, women stayed home cooking and taking care of the children while the men went to fetch water in a neighboring town. A visitor suggested they build a well, as there was water underground. Although building the well required extra initial effort, after its completion, the village could evolve, as the labor that fetched water every day could be used in other activities. Sometimes, it’s necessary to invest to grow.

How to Position Your Products as Premium

What is a Premium Product?

A premium product is something special, of high quality, and usually costs more than common products. It’s like a “luxury product” that people buy because it’s better or more beautiful than others.

Example with Mary’s Cookies

Let’s imagine Mary makes two types of cookies:

1. Simple Cookies

• They are tasty but have nothing special. They are like the cookies you can find anywhere.

2. Decorated Cookies

• These cookies are different. Mary uses her skill and creativity to decorate them with beautiful and personalized designs. They are made with high-quality ingredients and have an incredible taste.

Mary’s decorated cookies are a premium product. Let’s understand why:

Why are Decorated Cookies a Premium Product?

1. Superior Quality

Mary uses the best ingredients to make her decorated cookies. This makes them have a delicious taste and an incredible appearance.

2. Handcrafted Work

Each decorated cookie is handmade by Mary. She puts a lot of time and effort to ensure each one is perfect and beautiful.

3. Personalization

Mary can decorate the cookies according to the customer’s request. If someone wants a cookie with a superhero or flower design, Mary can do that. This personalization makes the cookies unique and special.

4. Special Experience

Buying and eating a decorated cookie from Mary is a special experience. People don’t just buy a cookie; they buy something beautiful and delicious that was made with a lot of care and attention.

Comparing the Two Types of Cookies

Type of Cookie	Characteristics	Price
Simple Cookie	Tasty, common, made quickly	U$ 2.00
Decorated Cookie	High quality, handmade, personalized	U$ 15.00

Summary

Premium Product: Something special, of high quality, and usually more expensive.

Mary’s Decorated Cookies: Are a premium product because:

• They use high-quality ingredients.
• They are handmade with a lot of care.
• They can be personalized.
• They offer a special experience.

By understanding that Mary’s decorated cookies are a premium product, people are willing to pay more for them because they know they are getting something unique and of high quality.

Importance of Believing in the Value of Your Product

Believing in the value of your product is fundamental to positioning it as premium. When you trust the quality and the differential of what you offer, this confidence is transmitted to your customers. They perceive that they are buying something special and valuable.

Amy Cuddy’s “Fake it Until You Make it” Talk

Psychologist Amy Cuddy, in her famous TED talk, talks about how posture and confidence can influence our chances of success. She suggests that even if you don’t feel confident at first, acting as if you are can help build that confidence over time.

Link to the Talk: Amy Cuddy: Your Body Language May Shape Who You Are

Applying the Concept to Your Business

1. Confidence in Presentation

When talking about your products, show confidence. Believe in the value you are offering and convey this to your customers.

2. Professional Posture

Maintain a professional posture in all interactions with customers. This includes everything from product presentation to customer service.

3. Consistency in Quality

Ensure that the quality of your products is always high. This reinforces customer confidence and justifies the premium price.

Summary

Believing in the Value of Your Product: Transmits confidence to customers and helps position your products as premium.

Amy Cuddy’s Talk: Teaches that acting with confidence can help build that confidence over time.

Application in Business: Confidence in presentation, professional posture, and consistency in quality are essential to positioning your products as premium.

Conclusion

Taking care of your business’s finances is essential to ensure its success. Separate your accounts, formalize your business, control your finances, understand your costs, calculate your break-even point, know the difference between profit and pró-labore, and value your products. And remember, your decorated cookies are a premium product!

For more tips and content on entrepreneurship, don’t forget to check out our Sweet Bite APP Blog.