Posts Tagged ‘bookkeeper’

Making Any Money? Can You Tell?

March 11th, 2013

Profit means making more money than you spend. Many confuse profit with income. As a result, they don’t understand why all their income isn’t getting them ahead; why no one wants to invest in their high-sales company; why the bank won’t extend their line of credit.

Let’s look at the most basic way to tell if your business is actually profitable, making money, not just recording sales.

Most small business people are very good at tracking their income. Each widget sale is recorded in a spreadsheet, and each payment from a customer or client is recorded in the checkbook. Each is totaled frequently.

Actually, that’s not what you made. That’s income, not profit. It’s what’s coming in. In order to determine profit you have to subtract what is going out from what is coming in.

(PROFIT = INCOME – COSTS)

Calculating Costs
Your business has two basic types of costs; fixed and variable. Fixed costs are costs that don’t change based on your level of business activity, such as rent. Whether you produce 100 widgets per day or 150, your rent will stay the same. Variable costs are directly tied to how many units of goods you produce. If you need $10 of screws to produce 100 widgets, you will need $15 worth of screws to produce 150 widgets. The cost of screws is a variable cost.

Fixed Costs
For the most part, fixed costs can be closely estimated at the beginning of the year and accurately projected for the next 12 months. For example, you know the rent on your facility is $5,000 per month. You may know of, or expect, a rent increase in April to $5,500 per month. As a result, your fixed cost for rent will be $64,500 for the year (3 months at $5,000 plus 9 months at $5,500).

Fixed costs include things like rent, depreciation, licenses, equipment lease payments, some taxes, and indirect labor.

Variable Costs
Variable costs are those that depend on your production level. As the production volume goes up, the variable costs go up as well. If I make lamps, I have to purchase one lamp pole, two light bulb fixtures, a lamp shade and five feet of wire per lamp. If a lamp pole cost $3 and I need enough to make six lamps, my lamp pole costs will be $18. However, if I need to make 20 lamps, my lamp pole costs will be $60. I can estimate variable costs at the beginning of the year, but my estimate will not be as predictable as was my estimate of fixed costs.

Variable costs include such expenses as cost of materials used in manufacturing, certain utilities, some taxes and fees, and direct labor.

Telling the Difference Between Fixed or Variable Cost
Some costs the business incurs, such as labor will have to be split between fixed costs and variable costs. The wages you pay production labor, called direct labor, is a variable cost. It is tied to how many units you produce. Other labor costs, such as the salary you pay your administrative assistant, are fixed costs. These indirect labor costs are not tied directly to production levels. If your production increases from 100 widgets per month to 150 widgets per month it is unlikely you would hire an additional administrative assistant.

Utilities are another cost that is split between fixed and variable costs. Your phone bill, for instance, probably won’t change much as production increases or decreases. However, the demand for electrical power, and the cost of it, will increase as production lines run longer and lights stay on further into the night because of increased production.

Income
When someone pays you that is income. Income is usually related to production levels, but is not tied to it directly.

You may produce more or less than you sell. For instance, if you have 100 widgets in the warehouse when you receive an order for 150, you only have to produce 50 additional widgets. If you make widgets for skis, you may make 20 widgets every month during the summer even though you don’t sell any, just so you have enough in the warehouse when winter arrives.

So income is when you actually get paid, not when you make the product you are going to sell. Total income is just the total of all your payments received during the year.

Break-Even Analysis
The break-even point is the production level where your income for a certain number of units produced equals your fixed costs plus the variable costs for that number of units. For instance, you have fixed costs of $500, variable costs of $20 per widget, and you sell the widgets for $25 each, so your break-even point is 100 widgets.

If you reduce your fixed costs to $400, your break-even point is 80 units. Or if you cut the cost per unit from $20 to $15, your break-even point drops to only 50 widgets.

 

Profit
Any sales beyond the break-even point are profit. In the final example above (fixed cost $500, variable cost $15 each, income $25 each) your break-even point is 50 units. If you produce 50 units and sell 50 units you will break even. Your costs will equal your income. You will have a profit of $0. If you sell less than 50, you will have a loss. If you sell more than 50 you will have a profit.

For example, if you sell 70 units your fixed costs are $500 and your variable costs are $1050 ($15 x 70), so your total costs are $1,550. Your income is $1,750 ($25 x 70) and your profit is $200 ($1,750 – $1,550).

Bottom Line
To make a profit, you must be able to sell each unit for more than it cost to make it and you must be able to sell it for a price high enough to cover both the variable cost of making it and its share of the fixed costs.

This is true whether you are selling widgets, boxcars of apples, dance lessons, or hours of financial consulting.

5 Tips for Cash Flow Management

December 18th, 2012

Cash flow is the lifeblood of any business, and in any business there are cash flow dangers. There is a capacity for a business to accumulate costs. They gradually grow month-by-month and your cash flow gradually diminishes to a trickle and finally dries up. Your only defense is to watch, record, compare and trend your costs.

Understanding what the numbers mean is crucial to your cash flow. Are sales trending up or down? Are expenses rising faster than sales? Is one product more profitable or better selling than another? How much do I need to sell to meet expenses each month? The answers all lie in the numbers.

The best way to measure cost trends is by analyzing the expense categories in your software, and ideally graphing them to get a better visualization of their impact. If the chart of accounts in your program is properly designed, you can produce the graphs for each cost item and quickly be able to see that your power bill, for example, is gradually rising. This new perspective can now lead to an informed change in behavior that will reduce those costs or at least reduce the increase in those costs.

Once you have established your costs, you should compare them against the industry average, or at least use your own common sense and business experience. If you keep your books accurate and up to date, you will be able to calculate the relationship between your gross sales and the expenditure in any category. For example, with the help of your historical data, you may decide that your postage should be 2% or 3% of gross sales. When you look over your month-end reports, you may discover that it has risen to 5%. Catching it early, you can now take corrective action.

If you are able to control your expenses, you can develop a healthy constant cash flow. Normally, it’s the cost of your expenses that sucks up your cash and put you in an uncomfortable position.

When your bills are greater than your sales/receivables, your first reaction is most likely that you need to increase sales and collections. Although that is always a good idea, even when there isn’t a cash flow problem, there is still very good reason to pay particularly close attention to your expenses. If when looking at your figures, you see that it takes five dollars to put one dollar on your bottom line, it then takes $5,000 of sales to yield $1,000. This means that saving $1,000 in costs is exactly the same as generating $5,000 worth of sales.

You need to look at your cash flow from an informed perspective. Here are five areas to focus on:

1. Mismanaging Credit
There are two common ways to mismanage credit in small business; granting credit without specific credit policies, and using credit with no plan for how to pay for it.

Both have a huge impact on your cash flow and are often closely related. For example, you have an opportunity to work on a big project, for which you will need to order materials. Your supplier expects payment in 30 days, but you won’t receive cash for the project for 60 days. Right away you’ve put yourself into a cash flow crunch that could take months to recover from financially. In the meantime, you’ve passed on smaller jobs that would have provided quicker cash at less cost. And, if you’re unable to pay your supplier on time, you’ve endangered that relationship as well.

2. The relationship between Receivables and Payables
In a perfect world, what customers owe you would be paid just in time for you to pay what you owe your vendors. But, as any small business owner knows “stuff happens”. The customer you thought would pay this week, doesn’t. So the bills you thought you’d pay this week, don’t get paid. Are your payables in balance with you receivables? If what you owe to others is far more than what is owed to you, then you have a cash flow problem. And if your receivables are particularly old, chances are good you’ll never see that cash at all.

3. Focusing on profit instead of cash flow
Is profit the ultimate goal of every business? Did you know that many businesses that fail are operating at a profit? How can that be? For the small business, cash flow is the ultimate goal. No cash flow. No business.

The difference is mostly in the decision making process. If you take on this big job, it will earn you a huge profit, but if you take on five smaller jobs, you’ll have cash to pay your bills. Yes, you want to be profitable, but every decision has to be measured against the effect it will have on cash flow.

4. Don’t forget your debt to the Tax Man
Some bills are easy to forget. Bills like sales tax, payroll taxes, estimated taxes. They just sit out there, almost off the radar. They don’t have to be paid right away. It’s easy to forget about them. But when they’re due, they’re due right now. And you better have the money to pay them or you’re in hot water with the Tax Man. That is not a place anyone wants to be. Pay them late or not at all and you end up with penalties and interest on top of what’s already due. Using the money that needs to go toward taxes to solve cash flow problems results in even more, and probably worse, cash flow problems when those taxes come due. It can take months or even years to recover.

5. Spending your company’s future on a sailboat
Haven’t you always wanted a boat, a fancy car, or a trip to Tahiti? It might be tempting to try to pass your personal purchases off as tax-deductible business expenses. But, it’s a bad idea for two reasons.

The people at the IRS are over-worked, but they weren’t born yesterday. The last thing you need is an audit that could reveal your transgressions and result in an unexpected tax bill plus penalties and interest. No company’s cash flow should have to suffer that indignity.

The other reason it’s a bad idea is that you are spending your company’s future on unnecessary expenses. Small businesses operate close to the edge. Unless you have a reserve to see you through the tough times, you’re always in danger of being on the wrong side of that edge. You must take care of the cash flow first. Then, you can pay yourself a properly taxed bonus and buy all the toys you want.

4 Reasons Why Small Businesses Fail

July 16th, 2012

It is no longer news that 99% of all new business ventures fail in the first ten years. Since the dream of every entrepreneur is to build a successful business, here are, tactfully highlighted, 4 major reasons why small businesses fail and how you can bulletproof your business against them. Join me as I expose these business killers:

1. Poor Attention to Generating Sales:
If a business cannot attract customers, then it will fail. Closing sales is the core mission of all for-profit businesses, and yet it is the most common reason for business failures. A company’s business plan must specify the sales process. Will customers be attracted by advertising and promotion alone, or will it require salespeople to obtain business? Is the nature of the business that it will need inside or outside salespeople, or both? Will the owner or partners be the salespeople? Will salespeople need to be hired, or will the sales function be contracted out to a marketing representative company? If this basic need is not addresses and implemented successfully, the business will not be successful and will most likely fail

2. Lack Of Managerial Skill:
When a small business owner lacks the managerial skills required to drive the business to greater heights, the business is bound to fail. An entrepreneur that wants to succeed must be able to effectively handle the employees, cash flow, production line and so on, or the business owner must be able to hire a good manager to run the business.

3. Wrong Business Decisions:
This is common to everyone irrespective of your field. There are many instances where, after carrying out critical analysis on a particular situation, the entrepreneur comes up with a decision considered favorable. But on implementing that decision it backfires, and at the end of the day it results in anything from unwanted tax audits, regulatory agency compliance issues, employee resistance, unexpected customer reactions or even lawsuits.

So whenever you decide on an action to be implemented on your business, consider asking friends, business partners and professionals for advice. It is going to save you the stress of cleaning up the mess resulting from wrong business decision taken.

4. Harsh Government Economic, Fiscal And Monetary Policy:
This is a problem for both large and small businesses. As an entrepreneur, you must be on guard to bulletproof your business against the ever-changing government fiscal and monetary policies.

Since you cannot influence or alter the government’s decisions, you must be prepared to swiftly adjust your small business to align with the government rules. This will help prevent it from being hit by the adverse effect of unfavorable government policies. Instances of such government policies and effects you must keep an eye on are tax reporting and compliance matters, double taxation, duties and levies, exchange rates, policies that effect inflation, and so on.

Cool Product: Constant Contact

May 3rd, 2012

email marketing made easy

I’ve been using Constant Contact to give my emails a professional look for almost a year and a half. I’ve now put out 17 issues of my newsletter, The Small Biz Bulletin (get it free – see the Join Our Email List link to the right —–>), and have noticed that dozens of businesses on my emailing list have adopted this product for their use too. So, it’s high time I did a Cool Product Review on it.

Constant Contact email combines your email campaigns and your social networking efforts into one easy-to-use service. It’s intuitive and easy to use for all skill levels. It breaks down the set-up process into three easy steps: “Create the look, select your audience, then schedule and send.”

Email Campaign Creation

You start by picking one of over 400 templates as the basis of your email, or create your own. The templates come in a variety of layouts, colors and patterns, are easy to customize as well as to insert text, images, documents, blog content, links, surveys, polls, videos and more. There’s a social-share toolbar and buttons for Facebook, Twitter, Google+, LinkedIn and others to send readers directly to your various social media properties.

Campaign Reporting

You’ll get comprehensive reports on your campaigns, including bounces, spam complaints, opt-outs, click-throughs, forwards and more. And Social Stats reporting tools tell you the number of Facebook shares and likes, tweets from Twitter and more, that your messages receive. You can also see the number of total social shares and page views your email campaign has generated.

Contact Management

You can add customers to your list by typing them in, importing a spreadsheet list or your address book from Gmail or Outlook. Contact fields are customizable so your contact database can hold all the info you need to keep on each contact.

Help & Support

Support includes a searchable knowledge base, tutorials, FAQs, a user manual, a blog, user forums, recorded demos and webinars. And the phone support is the best I’ve ever had for any product I’ve ever needed help on. They will even edit your email directly to fix a problem.

Try Constant Contact for Free!

You can try Constant Contact for free for 60 days to see if it fits your needs. If you do want to try it, click on the link below (or the logo at the top) and you will also receive a $30 credit when the free trial is over. Full disclosure: Yes, they will be kicking me back a $30 credit too, but if a couple hundred of you stick with it, well it could be sweet! Thanks!

Click here to get your 60 day free trial and your $30 credit if you continue beyond the trial period.

 

Simplifying the Profit & Loss Statement

March 29th, 2012

You might not need to be an accountant to be successful in business, but understanding financial reports will help you understand the basics of financial management and feel comfortable using standard financial tools and metrics to monitor and appraise the performance of your business.

How a Profit & Loss Statement helps you manage your business

Financial reports distill the vast amount of daily business data your company produces and arranges it into a usable format, useful in making the best possible business decisions.

Producing regular profit and loss statements, at least quarterly or monthly, will enable you to:

1. Answer the question, “How much money am I making, if any?”

2. Compare your projected performance with actual performance

3. Compare your performance against industry benchmarks

4. Use past performance trends to form reasonable forecasts for the future

5. Show your business growth and financial health over time

6. Detect any problems regarding sales, margins and expenses within a reasonable time so adjustments may be made to recoup losses or decrease expenses

7. Provide proof of income if you need a loan or mortgage

8. Calculate your income and expenses when completing and submitting your tax return.

What is a Profit & Loss Statement?

A profit and loss statement, also know as a P&L or an Income Statement, records sales income, costs and expenses and shows business performance over a specific period of time.  Profit and loss statements:

1. Show business performance over a specific period of time

2. Show income (revenue from sales)

3. Show the costs of the goods you sell (Cost of Goods Sold) such as purchases made from suppliers for goods or raw materials

4. Shows your gross profit (income minus cost of goods sold)

5. Show operational expenses (overhead and other expenses of running your company)

6. Show net income or loss (whether a profit or loss has been made )

Creating a Profit & Loss Statement

The figures in a profit and loss account will come from a number of different sources in your business, so it’s best to organizes and categorize your day to day receipts and expenses into a Chart of Accounts which represents the income and expense categories you want to track and evaluate. This Chart of Accounts forms the core structure of your bookkeeping system, and will be the basis for your Profit and Loss Statement.

A Profit and Loss Statement will usually look something like this:

$250,000       Income
  $10,000        Less Discounts
$240,000        Equals Net Income

   $50,000       Less Cost of Sales/Cost of Goods Sold
 $190,000       Equals Gross Profit

$100,000       Less Operating Expenses
  $90,000       Equals Operating Profit

$5,000        Plus Other Income
    $3,000        Less Other Expenses
  $92,000        Equals Net Ordinary Income (Profit Before Taxes)

  $33,000        Taxes
  $59,000        Net Profit (or Net Loss)

 Accounting Software and Financial Reporting

Accounting software makes it easy for you to create different views of your data. For example, you can compare this month with last month, this year-to-date with last-year-to-date, several months in sequence, or you can convert the figures into percentages and compare them that way. All this makes it easier for you to identify trends over time.

Your goal in business is for your sales and profits to increase, and your expenses, as a percent of sales, to decrease. Look at your profit and loss statements and compare them from one period to another. Are there any sudden changes or anomalies that raise a red flag? For example, if your office expense spending suddenly rose from $100 a month to $500 for one month, you would want to look into this. Or if your staff costs on average 30% of your income and this figure suddenly goes up to 40%, again you would want to investigate.

You can also draw some deeper conclusions than just seeing that more money is coming in than before. Is the increase equivalent to, or better than, the rate of inflation? Is it the result of more sales, or is it hiding the fact that although you have charged more per sale, you actually made fewer sales? And looking ahead, is the rate of increase in line with your goals, or do you need to set a new target? These are just some of the many questions accurate reports can help you address.