Posts Tagged ‘financial management’

8 Reasons Small Businesses Can’t Make a Profit

November 11th, 2013

8 Reasons Small Businesses Can’t Make a ProfitI know from running an accounting and bookkeeping practice that many small business owners are making the same mistakes, and those mistakes prevent them from accomplishing the goal of being profitable. After all, a business isn’t there just to make money, it should be profitable.

This list of eight common mistakes that reduce or eliminate profitability is one all small business owners should check themselves against:

1.  Underestimating all the costs involved in producing, packaging and shipping a product
2.  Overestimating the size of the market for a product or service
3.  Undercharging for their services
4.  Not classifying expenses properly to take advantage of tax codes
5.  Purchasing too much, not enough or the wrong kind of insurance
6.  Overpaying on bank fees and credit card fees
7.  No collection process in place for customers that have not paid
8.  Not having accurate, up-to-date reports to provide the above information so corrections can be made

Many business owners try to keep their own records, (or have a spouse or friend help) and because they lack the knowledge and/or time to do it properly, they don’t have the information needed to evaluate and correct potential problems.

Sometimes there is enough money coming into the business to continue despite making many of these errors but correcting them could mean a much better payback for the owner. More often what happens is that the owner gets frustrated and overwhelmed. In such an environment of confusion time is not leveraged properly, decisions can be made in desperation, and more and greater mistakes are made, further distancing the company from its profit objective.

Once a proper bookkeeping system is set up and brought current, the owner can see the whole picture and assess where changes need to be made. Sometimes minor changes like switching to a different bank or credit card company, increasing prices, or outsourcing a specific task can have a big impact on profitability. Other times something more involved is necessary such as implementing a system of pricing levels, changing advertising tactics, or even changing the direction of the company to be able to offer a more competitive and profitable product line.

Having accurate bookkeeping, and its associated reports, provides the business owner with the necessary information to get a clear picture of the economics of the company. Evaluating business operations and making the day-to-day decisions becomes a process based on the facts of the business not the “feel”. Even if your company makes pants, you shouldn’t be running it by the “seat of your pants”.

6 Tips for Cost Improvement

June 12th, 2013

6 Tips for Cost ImprovementMost small business owners can agree that saving more money is a continually reoccurring topic. Cutting costs, boosting cash flow and paying less in taxes, will allow you to keep more of what you make, and is a good entrepreneurial frame of mind to be in.

To take this from prudent thinking to actual practice, and put more money in your own pocket, utilize these six tips to put your business on the path to fiscal improvement.

1. Talk to your employees
Employees who are on the front lines of your business, dealing with customers, processes and systems, often have ideas for ways you can cut costs. Have you listened to them? Sit down with your employees and brainstorm ways that costs could be cut without sacrificing quality. Make it more interesting for them by offering a bonus to the people who come up with ideas that have a positive impact on the bottom line.

2. Pay attention to detail
Often, substantial sums of money slip between the cracks a few dollars at a time. One good crack to seal up could be done by reevaluating your businesses recurring expenses. This could be a subscription you signed up for a year ago, insurance that you no longer really need, or a monthly membership fee to an organization you’re no longer involved with. Auto billing is a great way to reduce the cost of paying reoccurring expenses. But it is common that these fees can get rolled into your monthly credit card bill to the point that you no longer notice them. And little sums do add up. Go over all invoices and bills in detail and cut out anything you don’t really need. And don’t stop after looking at auto payments, review everything that isn’t providing a return on investment (ROI).

3. Negotiate with vendors
What you’ve been paying your vendors does not have to be the final word on what you continue paying. Ultimately, vendors want to stay in business too, and they’re dealing with a tough economy just as you are. Many are often willing to negotiate lower prices rather than lose a regular customer. The potential to save money, without even having to change vendors, can result in better prices on everything from office supplies to the phone bill. You certainly won’t lose anything by trying, and you may find yourself able to shave several hundred dollars off your monthly operating costs.

4. Stay on top of your invoices
One of the biggest cash flow problems for small businesses are the slow-paying customers. To speed up the process, make sure your invoicing system is working smoothly. Your invoices should be clear, easy to read, and simply state what is due and when. Make sure you’re meeting any special requirements of each customer, such as including purchase order numbers, and that your invoices are going to the right person at the right address. This may sound basic, but simple errors like putting the wrong suite number on an invoice can cause delays.

5. Enable customers to pay invoices faster
Once your invoicing system is cleaned up, look for other ways to encourage customers to pay you even faster. Depending on your industry and financial situation, this could mean offering a discount for cash payments or early payments. Encourage your customers to use e-payments. This will not only enable faster payment, but also saves processing time on your end.

6. Partner with your accountant
Sure, you have an accountant, but do you only get together at tax time? A good accountant can help shape up your business’s finances all year long. Enlist your accountant to give your company a checkup. What could be improved? Where could you cut costs, free up cash, or make more by putting profits back into the business? Check in with your accountant once a month to follow up on results, fine-tune systems, and make sure your company is on track. There is a wealth of information in your books for improved business decisions. Have your accountant help you access it and be rewarded with higher profits, better cash flow, lower expenses, reduced taxes, and more money going into your pocket.

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.

Cool Product: Carbonite Business

January 19th, 2012

If you want the ultimate in off-site data protection, look to cloud computing solutions such as Carbonite Business to help you survive and recover from disasters that wipe out your physical systems.

Unlike traditional daily or weekly backups, Carbonite Business continually backs up the files on your PCs to its secure data centers throughout the day. There’s no intervention required by your employees, and you have complete visibility into, and control over, individual backups via the handy My Company Dashboard, where you can see your users, computers, storage in use, backup status and more.

Best of all, the pricing scheme for Carbonite Business can’t be beat. Instead of paying per PC, you pick the plan that fits your storage needs, 250GB for $229 per year or 500GB for $599 (which includes service for one Windows server), and protects as many machines as you need, resulting in one of the lowest per-gigabyte storage prices of any online business backup solution. The home and home office version starts at $59 per year per computer.

Never interrupts your business
With Carbonite, your backup happens automatically, in the background. Users never have to stop working, and after the initial backup, shouldn’t notice any impact on performance. And no one has to choose between backing up and doing their jobs.

No hardware required
Carbonite is 100% software-based backup – there’s no hardware to install or maintain, no wires to connect, no disks or tapes to deal with, no technician needed. You simply install the software and Carbonite takes care of the rest.

Safer than local backups
Your backup is encrypted at all times, and stored on redundant disk arrays that are immeasurably more reliable than internal or external hard drives. (If you have external hard drives you can back them up with Carbonite Business, too.) Our state-of-the-art, guarded data centers protect your business backup from theft, fire, water damage and anything else that can happen at your office.

Smarter than scheduled backups
Carbonite backs up your data continually, updating your backup in the background – eliminating the potentially costly ‘backup gaps’ created by daily or weekly backups.

Restores files fast to minimize downtime
If you lose a file, get it back with a few clicks. If your hard drive crashes, restore all your backed up files to another computer via – or, for mission-critical recovery, have your backed up files shipped to you on a portable hard drive.

Anytime, anywhere access to backed up files
With Anytime, Anywhere Access, you can open, view and share any file in your backup from any computer connected to the Internet. Or use one of our free mobile apps to access your files from your iPhone®, iPad®, Android™ or BlackBerry® device.

Business Start-up Costs

September 12th, 2011

Understanding what it will cost to start up a new business is a major factor toward the success of every business.  Each business start-up will have unique needs. A retailer might need a storefront and staff to operate it, plus inventory, while a manufacturer might need machine shop equipment and trained staff to operate it, plus raw materials and a warehouse. If you’re starting an online business, you might be doing it at home, may not need an outside facility and will have minimal operating expenses and possibly no staff at all.

It’s best to determine the financing and borrowing needs of a new business by estimating its start-up costs when writing the business plan. Business plan writing software, the US Small Business Administration and other organizations offer start-up cost worksheets to help identify these business expenses. Or with a basic knowledge of spreadsheet software such as Excel and the following set of example cost categories, you can put a custom worksheet together yourself. 

Costs for a start-up business can be divided into these sometimes overlapping categories:

Permits and Licenses
A start-up cost estimate must include funding to cover not only the business license and Fictitious Business Name registration and publication, but also the cost of permits, zoning and possibly a zoning variance. You may also have expenses related to refitting your place of business to satisfy licensing and regulatory requirements. For example, your business may have to conform to fire safety regulations and may incur the cost of fire extinguishers, sprinklers and exit signs.

Professional Fees
Setting up a legal structure for your business (e.g. LLC, corporation, etc.), trademarks, copyrights, patents, drafting partnership and non-disclosure agreements, etc., will require attorney fees. You may also need to engage the services of an architect or engineer, and retain an accountant and/or a tax advisor. Consider that some of these professional service expenses may be ongoing.

Administrative Costs
Administrative costs include anything else you need to have on a daily basis to operate a business including express shipping and postage, and a wide range of office supplies, and other consumables.

There is no better protection from the unforeseen than to have the full and proper insurance coverage in place. You will need liability and property insurance to protect yourself and any business assets. Some businesses also require workers’ compensation, health, life, fire, product liability and professional malpractice insurance. Check what you need for the kind of your business.

Depending on your type of business this could be a considerable expense, or maybe not.  If you are starting a typical home-based service business your renter’s or homeowner’s insurance may cover your business equipment, supplies and inventory. But it’s best to be cautious and check your policy coverage with your insurance agent before you open for business. Often a small additional fee, perhaps $50 or so, will purchase a rider for your policy that will cover such equipment as your computer, telephone and printer/copier.

Premises & Business Location
Some costs for a business location are considered one-time business plan start-up costs such as building renovations, down payments on a mortgage, construction costs and landscaping.

Other costs of having premises are monthly expenditures such as the payment of a mortgage or rent, utilities, parking, building and landscape maintenance, and office security. Also consider that you will need to buy office furniture including desks, chairs, filing cabinets, etc.

Technology Expenses
A cost effective and efficient company will leverage technology and must estimate expenses related to computer hardware and software, printers, copiers, telephones (both land lines and cell phones), PDAs, website development, optimization and maintenance, internet access, security measures, and IT consulting and training.

One-time expenditures often include the purchase and installation of computers and telecommunication equipment including networks, phones, and mobile communications gear. Monthly expenses can include equipment leasing or payments and technical support services.

Marketing, Advertising and Sales Expenses
Marketing and promotion are vital to the success of any business. All businesses should have advertising budgets based upon their business models. A marketing plan will help determine the exact costs required for a specific business model.

Advertising should be considered a monthly expense that can include the cost of Internet and print media advertising, postage for mailings, design and printing costs for promotional brochures and stationary, public relations services, event or trade show attendance or sponsorship, trade association or chamber of commerce membership fees, plus related travel and entertainment.

Employee Expenses
Many business start-ups fail to include an estimate of the owner’s salary in their business plan start-up cost estimate. Omitting this important salary can cause undue stress during the first year, when the business may not be making a profit. Business owners should include a twelve month estimate of all employee costs, including salaries, payroll withholding taxes, worker’s compensation insurance, and benefits. Including your own.

Business Product
Businesses that sell a product must consider start-up costs for such items as initial inventory, vendor deposits, raw materials, manufacturing equipment, warehousing costs, product packaging, shipping, shipping insurance, and sales tax.

Businesses that provide a service must consider costs such as travel to client sites, mobile services and printing costs. Business product costs differ based upon the business product and business sales model. Writing a business plan will help to identify the start-up costs.

Operational Expenses
Operational costs should be budgeted out monthly. Estimate costs such as telephone, mobile services, Internet access, electricity and other vital services for a year, since the loss of any of them will directly affect the success of the business. Other operational costs include on-going , attorney and other professional fees, banking fees, credit card usage fees, and possibly transportation expenses.

Factor in the Time to Get Off the Ground
One critical component of getting an accurate start-up cost estimate is to determine the length of time it’s going to take you to open your new business. It will be very different if you’re opening a restaurant versus an eBay business. No matter what your business type, take into account everything you will spend, from the moment you begin the start-up process, through the moment you make your first sale. If you need three months from the time you sign a lease to the time you can put the open-for-business sign on your retail storefront, then calculate how much money you will need for salaries, electricity, rent and so forth, during those three months.

Learn the Specific Costs for Your Type of Business
There’s a wealth of resources available to you on the Internet that you can access to understand the specific costs associated with your particular business. For starters, engage multiple social media platforms, connect with other people in your industry, and post on message boards asking for help from fellow entrepreneurs.

Check out your industry’s trade association(s). There should be active members who are going through or have successfully navigated the start-up process, and they may be happy to share tips with you. You might even get access to sample business plans and checklists for your market niche, but most importantly, you’ll find out which hidden costs to be wary of in your industry.

Take every opportunity you can to network with business owners in your industry, both online and in person. They will have the best understanding of how the costs of a typical business in your industry balance out across the above categories. With that knowledge, you’ll be able to create a reasonable cost estimate for starting a business of your own.

Above all, be realistic when calculating your start-up costs. The first attempt to list out and calculate your costs may not be complete. Continue to research, consider your options, and refine your analysis until you’re satisfied with the final number, and then take the additional step of adding a miscellaneous line item for 10% of your total budget. The fact is, you’ll spend more than you expect to get your start-up business going, and the miscellaneous category will be there to cover the inevitable unexpected costs.