Don't Wait for
Tax Time to Look at the Bottom Line
by: C.J. Hayden
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, shouldn't a business owner already KNOW how
much money he or she made last year, last quarter,
or last month?
If you don't keep track of how much money you're
making, you have no idea whether your business is
successful or not. You can't tell how well your
marketing is working. And I don't 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 don't, there's 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. It's not enough to have a plan -- you
have to review it regularly.
Remember that lost profits can't be recovered.
When entrepreneurs compare their projections to
reality and find earnings too low or expenses too
high, they often conclude, "I'll make it up later."
The problem is that you really can't 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.
Don't be afraid to hire. Retailers and
restaurateurs wouldn't 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 owner's 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 doesn't 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 -- don't be one of them. |
