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How to Run Your Home Business Lean – and Profitable

If there’s one lesson this economic downturn teaches us, it is the importance of running our business operations lean.

Many small business entrepreneurs made the mistake of spending too much, too soon. They based their spending on the money that they thought will be coming in, not on the money that they actually have. While optimism in life is good, it is a big mistake to think that money will always come easily – and not preparing for those moments when things become tough (like right now).

These small business entrepreneurs also made the mistake of becoming too impatient to grow their businesses. They moved their businesses prematurely out of their homes to an office downtown, hired more employees than they should have, or rented too much space than they really needed. As a result, they overextended themselves and borrowed more than what they can pay.

Then the recession came – and with it the tightening of credit, decreased consumer spending, and reduction of corporate budgets. Now, creditors and lenders are running after these small businesses and they scramble to find additional credit or ways to increase their sales as quickly as possible. And this is the last place you’d like to find yourself into.

So what do you need to do to run your business lean – and profitable?

• Understand that making money is not easy. The first step is to have an appreciation of the realities of running a business. We hear the statistics of small business failure constantly: that 80 percent of small businesses fail in their first year. While it is good to believe that yours will be one of the 20% that will survive their first year and thrive, understanding that things could go wrong (and there are plenty!) may give you pause before indulging your spending wanderlust.
• Know your real financial situation. Have a clear picture of the profitability of your business. Make sure that you keep your books updated regularly. If you cannot do it yourself, hire an accountant or bookkeeper to help you understand your bottom line and where your business really stands financially. The worst mistake you can do is to do your books only at the end of the year, during tax preparation.
• Do not base your spending on your projections. Projections are just estimates, and they can be off for a wide number of reasons. You may have assumed that you will land a distribution deal, only to find that distributors are not willing to carry your product. Or you may have assumed that you will land this big client, but the deal fell through. The last thing you want to do is to base your spending on projections.
• Spend only when absolutely necessary. Treat each expense as if you don’t need it. As yourself a hundred times why you need to buy that new scanner or advertising space on that website. Will that expense give you a great ROI? Will it help improve your productivity, efficiency and ultimately, your bottom line?
• Keep track of your marketing spend. Do not run your marketing and advertising on autopilot. There are many home business and small online entrepreneurs who set up a Google Adwords pay per click account, set up their ads and their monthly budgets, and give their credit cards — then fail to even check how the campaigns are doing. But they incur expenses every month for campaigns that may not be optimal for their purposes. Monitor your marketing and advertising accounts, and make sure that they give you the results you need. If not, then your dollars spent for these campaigns may be used for something else.

Keep all of your expenses, at all times, as lean as you can for as long as you can. When you really have money in your account with a healthy cashflow, then you may have that fancy office.