Why do most entrepreneurs go broke at least once in their career (myself included)?

Because no one’s talking about the money!

In this blog post, we’re going deep on a topic that isn’t very fun for most people: confronting your finances.

But not to worry — I’ll keep it light and high-level because it’s important that you actually understand the subject.

In the first video of this 3-part post, I’ll take you through the financial goals that I put in place to protect my business and manage my personal assets.

Then, in the second video, I’ll give you the strategies and reports I’m using so you can achieve greater financial freedom, too, including:

• How to avoid going broke when you first make money

• How much of the business you should keep liquid

• The financial forms I look at every month (that saved me $1M this year)

• Which questions investors ask before they buy

Until this moment I’ve only shared this information with a few select members of my Blue Ribbon Mastermind…

But I’m sharing it with you now because implementing a basic financial strategy is one of the most important and least talked about skills a business owner needs to survive.

Not learning these lessons — or learning them too late — is the reason why most entrepreneurs go broke at least once in their career.

(Note: This information is based on my experiences only. You should always consult a financial strategist to determine what’s best for you.)

What’s Your Relationship with Money?

My background with money is that I grew up poor (or identifying as such). We were very rich with love and other things, but we didn’t have a lot of surplus money.

It was kind of rough at times: Our water would get turned off; our electricity would get turned off; people would fall through the floor because it was wet and moldy.

But now, I have the experience of having more money than pretty much anyone I know…

And traveling this path from not having a lot of money to having a lot of money has given me a unique perspective on how to run my business.

Which Type of Business Owner Are You?

Every year, I get to relate with tens of 1,000s of entrepreneurs at every stage of the game, and when we talk about money, these are the questions I ask:

“What’s going on with the money?”
“How are you treating it?”
“How does it feel?”

These questions will help you illuminate your relationship with money, and what you should watch out for.

In my experience, business owners fall into one of two categories.

This is the first avatar, which is very common when you first make money:

This is the person who’s made some money, and now they’re ballin’ out — swiping credit cards, wearing fancy jeans and buying expensive watches.

It’s so common, in fact, that it even happened to me.

Why Most Entrepreneurs Go Broke (At Least Once)

Carrie and I sold our first business in the middle of 2012 for a couple hundred grand. At the time, that was more money than either of us had ever seen.

Before that, we were living on Carrie’s yoga earnings while I was bankrupting us with failed ebook projects. (We’ve all been there, right?)

And if you’ve never had a big chunk of money all at once, let me tell you something: It’s very different from not having a big chunk of money all at once.

Then, somehow, six to nine months later, our $200,000 was gone.

We still don’t know what happened to it. I mean, I know I bought a lot of Diesel jeans and some computer stuff and Carrie joined a circus club… Who knows?

The point is, like most people who get some money for the first time, we spent it!

So why do most entrepreneurs go broke at least once in their careers (including myself)?

I think it’s because our society is driven by consumption. Our whole lives we’re told that the winning model for success is to be someone who spends a lot of money, so as soon as we get some, we’re programmed to use it.

We don’t think about taxes or whether or not that income source will dry up — we just Spend. That. Cash.

And the size of your business doesn’t matter: There are plenty of people with 8-figure businesses who are spending a lot more money than is smart or healthy.

Okay, that’s the first type of business owner. Here’s the second.

The Flip Side of the Coin

If being loose with your cash is one end of the spectrum, then the second avatar is the other:

This person is super tight with their money and always a little freaked out.

They’ve got anxiety in their chest and their heart’s pounding every time they look at their bank account or open QuickBooks, because for them, money is like a bar of soap: It just keeps slipping away.

And strange as it may sound, this avatar can sneak up on you.

A lot of people start a business, and then for whatever reason — they get some PR, ads start working, products are good — that business gets big.

All of the sudden, they have the pressure of dealing with people’s salaries. They didn’t realize what they signed up for until the whole thing starts riding on them, so they tighten up.

Which Money Mindset Should You Have?

If you’ve done any physical exercise, you know that being super tense doesn’t usually help you.

Well, the same is true when managing money.

If you want to have a healthy relationship with your money then neither of these avatars is the best one. Not on their own, at least.

You want to be relaxed most of the time, but still able to get intense when you need to.

Here are the financial goals I use to help me achieve this balance.

Achieving Financial Health for Your Business

I look at people’s finances a lot, and I know that most people are operating within a 1 – 3 month liquidity window.

Meaning that if everything went south tomorrow, their business would go under in about three months once new money stopped coming in.

You really don’t want to put yourself in this spot.

It’s so important to build up a big enough cushion to protect yourself from going under. (This is a concept I didn’t understand before I met Carrie.)

For me, achieving financial health for my business looks like this: 12 months of the business in liquid cash.

That means covering all of my staff salary, advertising costs, inventory money, etc. If I did not make another sale for an entire year, I wouldn’t go under.

It’s hard to achieve, but that’s my goal for my business.

Now, what about my personal finances?

Financial Health for Your Personal Life

The answer to this depends on what your personal spending is, including mortgage, health insurance, kids, vacations, groceries — all the things you pay for to sustain your lifestyle.

I can tell you that most of the business owners I know who are being extremely frugal are living on between $50,000 – $100,000 a year.

Meanwhile, business owners on the other end of the spectrum are ballin’ out on $500,000 – $600,000 (after taxes!).

Now, I’m not judging, and I’m not going to tell you which one I think is right or wrong. I think there are merits and benefits to both, but whatever this number is for you…

My financial goal is to have 24 months of my personal expenses liquid.

Meaning if I lost my job — if my business crumbled, if everything went away — I could continue living at my current lifestyle for two years.

I could take 12 months to chill out and let it all come down while I sat on a beach somewhere (or whatever). Then, I could spend the next 12 month building.

That’s the goal.

But Most People Won’t Do This

So, my financial goals are 12 months liquid for my business and 2 years liquid for my personal expenses…

But I know that most people are not thinking this far ahead in relationship to their money.

They’re not planning for two years from now. They’re not putting aside 5% of the profits to achieve this…

But if you don’t have a plan and you’re not being deliberate about setting goals, you’ll never achieve this level of security.

Your financial state will just go on being whatever the status quo is.

Your Goals May Be Different

Maybe the “12 Months and 2 Years Goal” feels too constricting for you. Maybe 6 months of business liquidity and 1 year of your personal expenses is more reasonable.

I tend to have big goals. I shoot for the moon.

But look, I know that confronting your money isn’t easy to do. It’s difficult, and it requires practice and making deliberate choices.

And to help you achieve these goals, in Part 2 of Money Talks I’ll give you the financial strategies and the business reports that I look at every month.

Talk to you then!