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 their bottom line — e.g. 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.
Recommended Books on Your Business’ Bottom Line:
- The Triple Bottom Line: How Today’s Best-Run Companies Are Achieving Economic, Social and Environmental Success – and How You Can Too
- Bankable Leadership : Happy People, Bottom-Line Results, and the Power to Deliver Both
- The Servant Leader: How to Build a Creative Team, Develop Great Morale, and Improve Bottom-Line Performance
- Good Works!: Marketing and Corporate Initiatives that Build a Better World…and the Bottom Line
- How to Read a Balance Sheet: The Bottom Line on What You Need to Know about Cash Flow, Assets, Debt, Equity, Profit…and How It all Comes Together
C.J. Hayden is the author of Get Clients Now!(TM): A 28-Day Marketing Program for Professionals, Consultants, and Coaches. Thousands of business owners and salespeople have used her simple sales and marketing system to double or triple their income. Get a free copy of “Five Secrets to Finding All the Clients You’ll Ever Need” at http://www.getclientsnow.com
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- Pros and Cons of Financing a Business
- Master Your Money Type to Create a Life of Wealth and Freedom (Part 2)
- 10 Tools of Profitable Revenue Growth
- 3 Keys to Balancing Debt with Revenue for Start-up