Don't Wait for Tax Time to Look at the Bottom Line
A curious thing happens to entrepreneurs in the spring of every year. They wake up one day and realize they had better figure out how much money they made last year so they can pay their taxes. But wait, shouldnīt a business owner already KNOW how much money he or she made last year, last quarter, or last month?
If you donīt keep track of how much money youīre making, you have no idea whether your business is successful or not. You canīt tell how well your marketing is working. And I donīt just mean you should know the amount of your total sales or gross revenue. You need to know what your net profit is. If you donīt, thereīs no way you can know how to increase it.
If you want your business to be successful, you need to make a financial plan and check it against the facts on a monthly basis, then take immediate action to correct any problems. Here are the steps you should take:
Create a financial plan for your business. Estimate how much revenue you expect to bring in each month, and project what your expenses will be. If you need it, get help from business planning books, software, or an accountant.
Review the plan monthly. Even if business owners take the time to prepare a financial plan with profit and loss projections, they often let it sit in a drawer. Itīs not enough to have a plan -- you have to review it regularly.
Remember that lost profits canīt be recovered. When entrepreneurs compare their projections to reality and find earnings too low or expenses too high, they often conclude, "Iīll make it up later." The problem is that you really canīt make it up later: every month profits are too low is a month that is gone forever.
Make adjustments right away. If revenues are lower than expected, increase efforts in sales and marketing or look for ways to increase your rates. If overhead costs are too high, find ways to cut back. There are other businesses like yours around. What is their secret for operating profitably?
Think before you spend. When considering any new business expense, including marketing and sales activities, evaluate the increased earnings you expect to bring in against its cost before you proceed to make a purchase. You can often increase your profitability simply by delaying expenses to a later month, quarter, or year.
Donīt be afraid to hire. Retailers and restaurateurs wouldnīt consider operating without employees, but many service businesses limit themselves by being understaffed. Almost any business can benefit from hired (or contracted) help. Business owners can often better use their talents for generating revenue than for running errands and filing.
Pay yourself a regular salary. If you are incorporated, you may already be doing this. If not, allocate an amount to ownerīs compensation on a monthly basis. Each month that your business meets its profitability goal, pay yourself the full amount. When you miss your target, dock your "pay" and when you exceed it, pay yourself a "bonus." Writing yourself a monthly paycheck will give you a strong incentive to keep your business profitable.
Evaluate the success of your business based on profit, not revenue. It doesnīt matter how many thousands of dollars you are bringing in each month if your expenses are almost as high, or higher. Many high-revenue businesses have gone under for this very reason -- donīt be one of them.
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