Accounting Jargon, Decoded for the Solopreneur

solo business logistics
 
As solopreneurs, we wear many hats in our business: customer support, copywriter, salesperson, and CEO. As we bounce from field to field trying to get our tasks done, we’re often bogged down by industry jargon. And the worst part of jargon is this: We get sucked into a rabbit hole of research trying to understand how these complex terms relate to our business.

One of the industries that is chock-full of jargon is the accounting and finance industry. In my opinion (and I think you might agree), it sometimes feels as though they’re just trying to overcomplicate things. Here’s looking at you, IRS.

This became especially apparent recently, as I was working with my friend Jenny on the launch of a new service, adding in-home cooking classes to her current catering business. As she was trying to work through the financial side of things, she kept running into over-complex formulas and explanations that didn’t relate to her solopreneur business.

We worked through her questions and I gave her basic explanations of some of the most important accounting terms, how to use them in her business, and why she should be sure to look at these items. I thought maybe an explanation could help you, as well.

Here are the main accounting topics we worked through and examples of how these relate to her new service launch:

Fixed costs

  • What it is: Costs that will not change, regardless of how much you sell (rent, website hosting, utilities, salaries, etc).
  • Why it’s important: Fixed costs are often overlooked but they can creep up and quickly take a big bite out of your profits.
  • When you should review it: Monthly, to make sure your costs aren’t creeping up

As this is a home-based business and an extension of an existing business, Jenny’s fixed costs aren’t too high. They include things like her website hosting, her advertising budget, and her own salary. We were able to estimate that her fixed costs would be approximately $2,500/month.

Variable costs

  • What it is: The cost you have when you actually sell a product (materials, hourly wages, shipping, etc).
  • Why it’s important: Without knowing your complete variable cost, it can be very difficult to price a product or service appropriately.
  • When you should review it: Also monthly, to make sure your costs aren’t creeping up

For Jenny, included in her variable costs is the food she buys for each cooking class as well as payment to the assistant she hires on an hourly basis to help with each class. We concluded that her variable costs total for each student is $20.

Contribution margin

  • What it is: Sales (income) from each product or service sold minus variable costs.
  • Why it’s important: This will tell you how much money from each item that you’ve sold can be used to cover other costs (like fixed costs). I use this as my first test to see if I’ve priced things high enough.
  • When you should review it: When reviewing your pricing or launching a new product/service

Jenny charges $60 per student and her variable cost per student is $20, leaving her with a contribution margin of $40 per student ($60 - $20). That means that for every student she has in class, $40 can go toward covering her fixed costs and hopefully making a profit!

Breakeven

  • What it is: The point where you have sold enough you are no longer losing money. To get this, you’ll take your fixed expenses each month and divide by your contribution margin.
  • Why this matters: This one is seriously a big deal. This is the point where you will either have a business that makes money each month, or loses money each month.
  • When you should review it: Also when reviewing your pricing or launching a new product/service

Jenny has pretty low fixed costs since she’s running a home-based business. Her breakeven point each month is $2,500 fixed costs / $40 contribution margin = 62.5 students each month. This means that in order for her business to not lose money, she needs to have approximately 63 students in her classes each month. If she sees more than 63 students in a month, she’ll have a profitable business.

Return on investment (ROI)

  • What it is: When you spend money, or invest, in a business you want to be sure that you’re making that money back, and then some. How you measure that is by using the return on investment. It is the sales you received from an investment minus the cost to fulfill those sales, divided by the cost of the investment.
  • Why it’s important: Use this calculation to make sure that the money that you’re spending on your business is working for you.
  • When you should review it: Before making an investment in your business such as new equipment or a marketing campaign

To advertise her new classes, Jenny is doing a sponsored post with a local food blogger that has a significant following in her city. The cost of the sponsored post is $750 and Jenny hoped that she could bring in 40 new customers from it. With that estimation her return on investment would be:

40 customers * $60 income per customer = $2,400
40 customers * $20 cost per customer = $800
($2,400 - $800)/$750 = 2.13

In other words, for every $1 that she spends on the advertising campaign she expects to get $2.13 dollars back. A pretty solid investment.

Understanding accounting jargon

At first overwhelming, these accounting numbers can be used pretty easily to evaluate your revenue and costs, and help make pricing decisions for your solo business. While accounting certainly isn’t the most fun aspect of the solopreneur lifestyle, having a foundational grasp on things like fixed versus variable costs, break even and contribution margins, and return on investment can help make sure you’re growing a healthy business that is paying you what you deserve.

Breaking Through Mental Money Barriers as a Solopreneur

There’s a lot to learn when getting started as a solopreneur. But with so many great resources that can help you, step-by-step, to start and grow your business, it should all just be easy breezy, right?

Not so much. So often, when it comes to actually putting what we’ve learned into action, we just get stuck. For solopreneurs, money is often one of those places where we feel ourselves trudging through mud.

What’s keeping you from moving forward to earn what you deserve? You may think lack of time, or maybe lack of knowledge. But so often, it’s the mental money barriers we unintentionally put up. Yep, mental money barriers are real and they’re keeping you from becoming the awesome business person you’ve dreamt of becoming.

So what’s an ambitious business owner like you to do? Identify your mental money barriers and create a strategy to get past them. Read on to see how you can move past four common mental money barriers -- because earning money as a business owner is as much about mentally getting into the game as it is learning the skills to run your business.

Money barrier #1: Don’t like the idea of charging? Create an epic value proposition.

Do any of these quotes sound familiar?

  • “I struggle with the idea of charging my customers for this product/service.”
  • “I don’t want to seem like I’m selling all the time.”
  • “It’s okay to give a friend (or a friend of a friend of a friend) a discount.”

For most people, myself included, the actual act of selling products or services makes their skin crawl. We picture pushy salespeople and disappointed customers. The concept of selling is intimidating, often leaving entrepreneurs significantly undercharging for their services.

It’s time to bury that barrier by creating an epic value proposition: a statement that clearly lays out what value you are providing to your customer with your product or service.

While many people use their value proposition to attract their customers’ attention, another way to use this is to get over your money barrier. When you focus on the value you are delivering your customer, you are mentally taking the emphasis off charging people and replacing it with the value you are delivering.

There no one way to create a value proposition, but author Geoffrey Moore provides this easy template to start with:

For (target customer) who (statement of need) our (product/service name) is (product category) that (statement of benefit).

A nutritional coach might frame their value proposition as: for busy working mothers who don’t have time to eat a healthy breakfast, my product is a book of 3-minute breakfast recipes that make eating a nutritional breakfast easy to work into their morning routine, giving them the great start to their day that they deserve.

Writing a value proposition is not an exact science, but the key is to focus on the amazing value you are creating for your customer.

Money barrier #2: Struggle spending money to invest in yourself and your business? Adopt an abundance mindset.

As entrepreneurs, most of us know what it’s like to pinch pennies and debate spending money as we work to get our business off the ground. While that’s not a bad thing, it can lead to a scarcity mindset, creating a money barrier that stands between you and the leveling up you deserve.

In the scarcity mindset, we focus on short term results and only having a limited set of resources. In contrast, the abundance mindset is focused on long-term growth and endless opportunities to grow.

To move into an abundance mindset in your business, stop looking at money spent on your business solely as expenses, and consider them as investments.

To be clear, moving out of a scarcity mindset and into an abundance mindset isn’t about spending recklessly and viewing everything as an investment. It’s about carefully considering the expense and measuring whether it is a true investment that is going to grow you or your business.

The next time you are considering spending money on something and you begin looking at the cost, take a minute to think about what it could potentially bring you. Will an improved inventory system help you ship more products? Will that course or mastermind help you move past a business plateau? It’s these important distinctions that can help break the scarcity money barrier.

Money barrier #3: Feel uncomfortable with the idea of becoming wealthy? Define your goals with a purpose.

Money gets a bad rap. There are so many bad examples of wealth and greed, that many of us unconsciously put up money barriers to keep ourselves from becoming wealthy. You might think this barrier doesn’t apply to you, but before you dismiss it, fill in the blank below to reflect on what wealth means to you.

Being rich/wealthy looks like ______________.

If the image that you come up with is primarily negative, you might have a money barrier related to becoming wealthy.

To move past the negative image, work on defining goals with a purpose. While most of us will set goals for our business related to how much money we want to make, try adding a purpose to create a new image of wealth.

For example, if you want to grow your business to have profit of $150,000 per year, what does that amount mean to you? Does it mean that your partner is able to quit their job? Or perhaps it’s that you’ll be able to spend more time with your family or contribute to a cause you love.

Spend time defining that purpose to create your new image of wealth. Write it down and keep it somewhere you’ll be able to see regularly.

Money barrier #4: Avoid mundane (but necessary) money tasks? Create a powerful habit.

When I started my first business, I was a pro at avoiding the mundane money tasks like invoicing, logging expenses, and just keeping things generally organized. I would procrastinate for as long as possible, making up excuses that it wasn’t as important as other things on my list, or that I wasn’t in the mood to do it.

And the longer I put it off, the larger these mundane tasks became. I had created a horrible mental money barrier with all of my excuses, which ended losing me quite a bit of money.

To break this, I created a weekly money habit. I know that a weakness of mine is logging receipts and sitting down regularly to go through my books. I also know that Friday afternoons I’m not up for anything requiring much brainpower. So I decided to create a money checklist and go through it for 20 minutes every Friday after lunch. The first few weeks of sitting down to do it were tough, but after a month these actions clicked and I began automatically doing them right after lunch every Friday -- no excuses.

To stop avoiding your necessary money tasks, create a checklist of the items you want to complete weekly and set a time do it. I recommend creating a list of items that will take 15-30 minutes to complete to start. To create an actual habit, tie it to something specific that you do every week. When you do that first action (for me, Friday lunch) it triggers my habit of completing my money checklist.

Break past the mental money barriers to grow your business

There may be other money barriers that are standing in your way (shout them out in the comments!), but the key to not letting them hold you back is to recognize that they exist and create a plan to move past them.