accounting management and bookkeeping basics for small business owners

although people drive the business of
doing business money fuels the engine that money can be counted compiled and
presented in numerous ways ways that in the right hands can provide a steady
flow of financial information with which you can accomplish a number of key
business functions including the following maintaining bookkeeping
information the bookkeeping process includes keeping records of physical
inventories monies due from others accounts receivable and monies due to
others payroll and accounts payable paying taxes federal state and local
governments require not only that every business pays taxes but also that it
keeps records to back those payments keeping score in order to determine
whether you’ll be able to meet next month’s expenses or whether your
business is profitability and cash are trending in the right direction you need
to keep track of the results of doing business providing a management
information tool information fuels the decision making process and the more
information you have as a small business owner the better your decisions will be
fortunately you don’t have to be a financial expert or whiz to understand
the numbers do you have to understand how a thermometer works to take your
temperature sometimes spent with your tax advisor
and several months of closely reviewing your personal financial statements
you’ll be able to properly use the financial information your business’s
accounting system generates our primary emphasis is on the use of financial
information as a management tool specifically we focus on information
that you can use to manage your cash flow increase your profitability and
improve your chances of staying in business for the long haul
cash flow to pay your bills you need to manage the money cash you have going out
and coming in that is your cash flow before you can have cash flowing out
you must have cash flowing in when your cash flows out in excess of what flows
in your business is heading for trouble to understand the basic concept of cash
flow you first need to distinguish between the following two oft confused
terms cash flow an operating term that describes the movement of money cash
checks electronic debits and credits in and out of your business profitability
an accounting term that refers to the capability of your business
to generate more sales dollars than what it costs to run your business when a
business is profitable profits don’t necessarily accumulate in the form of
cash instead they can take the form of an increase in other non-cash assets
such as inventory accounts receivable equipment or real estate yes those
profits may once have been in the form of cash but somewhere along the line you
may make the decision to shift that cash into another asset purchasing additional
inventory or buying a piece of equipment for example in this manner your business
can be profitable in accounting terms but still be short of cash in the
checkbook although an increase in cash is only one of the many possible results
of profitability it is by far the most important result because cash fuels the
day-to-day operation of your business if you’ve chosen to spend too much cash on
purchasing inventory and equipment or if you’ve been slow in collecting your
accounts receivable you may not have enough cash to pay your vendors and
compensate your employees after all you can’t pay them with inventory or
equipment ironically some profitable and accounting terms businesses have entered
bankruptcy because their owners made the wrong choices when allocating the
business’s precious cash instead of accumulating it they know
knowingly or unknowingly spent it on non liquid assets and then lo and behold the
bills came due and the cupboards were bare your business’s bank account or
money market fund is the obvious measure of today’s cash do you have enough money
in it to pay today’s bills and meet today’s payroll and will you still have
money left over when the day is done remember the difficulty comes in
projecting how much cash you’ll need in the future because every business must
be concerned with more than just what’s happening today in terms of cash
availability projecting tomorrow’s cash flow is an important task to do that you
need to consider questions like the following will you have enough cash to
meet next Friday’s payroll will you have enough cash to pay that big vendor
invoice that’s due the following Monday will you have enough cash to pay the
bank loan payment the upcoming utility bills and the real estate taxes that
will be due at the end of the month questions like these and the answers
they beg point out the need for preparing cash flow projections
forecasts of how much cash you’ll have over a given future time frame some
businesses project cash flow for 30 days out some for six months and some for an
entire year in advance to project cash flow accurately you need to polish up
the old crystal ball because you’re about to make many important predictions
for example you must predict your future sales the rate at which you’ll collect
the money that’s due you from those sales the dollar amount of your upcoming
payrolls the dollar amount of vendor invoices to be paid in the next day week
month six months or even year the better your predictions the more accurate of
forecasts you can prepare you can prepare your cash flow projections for
the next day next week next month next year or any combination thereof
predictions for longer time periods although potentially useful are likely
to be fuzzier and less accurate than predictions for shorter time periods
we recommend that you make your cash flow projections for at least six months
out and then update them at least once each month always staying six months out
that way you’ll spot problem periods earlier and be able to adjust to them
more quickly although most small businesses don’t
generate cash flow projections daily you should be tracking cash on a monthly
basis after all no matter how small or uncomplicated your business happens to
be cash is key we can guarantee you one thing at some point in your business
career you will have cashflow problems wouldn’t you rather anticipate the
problem before it happens then let it blindside you most accountants have a
pre-formatted cash flow projections worksheet available for their clients to
use whether you use their worksheet or something you create on your own make
sure you understand the concept of cash flow because it’s one of the most
important and least understood financial concepts that a small business owner
must know the concept is as simple as the concept behind maintaining a
checkbook for example knowing the balance in your checking account given
the inflows and outflows that you know are coming whether manual or computer-based the
accounting system you use should ultimately generate two financial
statements the profit and loss statement also known as the income statement and
the balance sheet both of these statements are produced at the end of a
business’s accounting period usually monthly quarterly or annually we
recommend that you prepare or have prepared your financial statements as
frequently as possible with monthly statements usually being the most useful
if your accounting system allows you to generate your financial statements
internally we suggest that you generate your statements monthly if monthly
statements are impossible for some reason quarterly statements will do but
don’t fall into the trap that many small businesses do by generating your
statements only once or twice a year financial statements function primarily
as a management tool and you can’t go 365 days without paying attention to the
information they provide the profit and loss statement P&L adds
all the revenues of your business and subtracts all the operating expenses
thereby providing you with a figure that represents what’s left over the profits
if the total expenses exceeded the total revenues your business would have a loss
rather than a profit the P&L measures the results of operations of your
business over a given time period typically a month a quarter or a year
choosing a P&L format when you sit down with your bookkeeper and/or tax advisor
to design your financial statement format always remember the cardinal rule
of business numbers any given number is meaningful only when compared to another
number you need to compare the current year’s figures to other numbers last
year’s actual performance or this year’s budget or preferably both you can use a
wide variety of formats in presenting a P&L we recommend that you use a four
column format for both the P&L and the balance sheet this four column format
allows you to quickly and easily compare the three key figures prior year budget
and current year the fourth column measures the percentage increase or
decrease in parentheses between the current year and prior year the process
you use to arrive at a P&L x’ net income conclusion isn’t difficult to understand
just follow these two easy steps 1 subtract from the gross sales the cost
of the goods that were included in those sales what’s left is the gross margin on
those sales the difference between what it costs you to produce your product or
service and the price you charge for it in other words the gross income before
subtracting operating expenses to subtract from that number all the
operating expenses incurred during that accounting period including all selling
and administrative expenses the number leftover is the net income as you can
see the trick is not so much in assembling
the pl but in retaining and retrieving all the figures that go into it the
better your accounting system the easier this process will be
the balance sheet the balance sheet provides a snapshot of a company’s
financial position at any given point in time as with the P&L the concept behind
a balance sheet isn’t complex quite simply the balance sheet is a list of
what your business owns assets – what your business owes liabilities with the
resulting difference being what your business is worth net worth this net
worth figure is also commonly referred to as book value remember the P&L is
designed to analyze profitability issues sales margins and expenses the purpose
of the balance sheet on the other hand is to analyze an entirely different
issue resource dollar allocation did you decide to allocate your dollars to
increasing inventory to paying off loans or to accumulating cash the small
business owner makes many asset allocation decisions over the course of
the year the balance sheet provides a year-end snapshot that summarizes the
history of those decisions by comparing the current year column on the balance
sheet with the prior year column you can readily determine what has happened to
the mixture of assets and liabilities over the year in other words how a
company’s management decided to allocate the company’s resources when using a
four column balance sheet format one might study the percent change compared
to prior year column if the total current assets didn’t change appreciably
two of the categories within the current assets category cash and inventory might
have if you use your financial statements as a management tool to guide
and direct your business the picture changes in some cases your financial
statements may even pay for themselves if the actions you take because of the
lessons they provide result in increased profits and/or cash flow for example in
a four column P&L statement if a business owner plugged the salary
increases into the budget before making them and been fully aware of the
impending negative impact on the company’s profitability she may
have given a second thought to this decision ditto with a balance sheet if
the owner made the decision to increase inventory and pay down her long-term
debt now the owner plugged those figures into the balance sheet budget she would
have understood the impact these decisions would have on the company’s
cash account and probably would have altered her decisions such is the power
of using financial statements and budgets they allow you to see the
results of your decisions before you make them every small business owner
should use the numbers and statistics that the business generates to help make
important decisions understanding key ratios and percentages
before you can take the numbers generated by the P&L and balance sheet
and turn them into meaningful management tools you need to consider 2 overall
points about the numbers ratios and percentages that come from those
financial statements comparisons work best your company may have what appears
to be a respectable percentage of net profit on its sales but if that
percentage is less than it was during the same period the preceding year
trouble may lie ahead numbers are most effective when you can
use them to identify trends and identifying trends always requires a
comparison of numbers over time acceptable numbers in one industry may
not be acceptable in another industries vary widely in the numbers they generate
for example if you’re in the software business you may be disappointed with a
15% profit return on your sales dollar if you’re in the grocery store business
however you’d probably be ecstatic with a 5 percent profit return on sales if
you don’t know the acceptable ratios and percentages in your industry contact
your appropriate trade association most trade associations can give you the
benchmark ratios and percentages that you need to know to compare your own
business to industry averages we strongly suggest that you learn how to
extract the key ratios and percentages from your financial statements by
yourself instead of depending on your bookkeeper or tax advisor to do so the
process itself gives you a better idea of where the numbers come from and how
you can use the financial statements for other ratios and percentages that may be
meaningful to your individual business although any ratio or percentage alone
won’t give you all the information you need to become a sophisticated financial
manager the knowledge of how they all work together will make you much more
effective as an owner manager return on sales our OS return on sales
our OS is a percentage determined by dividing net pre-tax profits from the
P&L by total sales also from the P&L the resulting figure measures your company’s
overall efficiency in converting a sales dollar into a profit dollar our OS very
much depends on what type of business you operate
remember our OS is an excellent figure on which you and your employees can
focus it’s relatively easy to track understand and explain some businesses
use this percentage as a company-wide scorecard to help their employees
understand how the businesses make money thus motivating them to do their part in
assuring and improving profitability most employees think their businesses
make much much more money than they really do
return on equity ro e return on equity ro e is a percentage determined by
dividing pre-tax profits from the P&L by equity net worth from the balance sheet
the resulting figure represents the return you’ve made on the equity dollars
that are effectively invested in your business over several years if your
return on equity isn’t higher than 5% or there abouts which is the average return
on money invested in such secure investments as short term high-quality
bonds you may want to consider selling your business and investing the proceeds
and bonds your return would be similar but your risk and the work involved
would be much less this assumes of course that you’re in business to make
money if however you’re motivated by something else
creativity growth independence or if you simply like owning your own business you
may be content with miniscule earnings even though you can make a similar or
better financial return elsewhere note both our o s and ro e are impacted
heavily by the amount of money the owner decides to take out of the business in
the form of salaries bonuses and benefits obviously the more taken out
the lower the our OS and ro e percentages will be
gross margin gross margin is a percentage determined by subtracting
your cost of goods sold from the P&L from total sales also from the P&L this
figure represents your business’s effective overall markup on products
sold before deducting your manufacturing and/or service providing expenses how
high or low your gross margin is depends on your industry your business your
pricing strategy and the products or services you’re selling the trade
association for your industry can give you industry-wide benchmark numbers for
gross margin remember trend is especially important with gross margin
over time you want to see an increasing rather than decreasing gross margin
currents ratio currents ratio is a ratio determined by dividing current assets
from the balance sheet by current liabilities also from the balance sheet
the resulting figure measures your business’s liquidity the ability to
raise immediate cash from the sale of your assets
thus this ratio is of great interest especially to your lenders and/or
outside investors the higher the current ratio the more liquid your business
generally current ratios in excess of two to one are considered very healthy
anything less than one to one is in the danger zone again trend is especially
important here over time you want to see an increasing rather than decreasing
current ratio debt-to-equity ratio the debts to equity
ratio is a ratio determines by dividing equity net worth from the balance sheet
by debt total liabilities also from the balance sheet the resulting ratio
indicates in effect how much of the business is owned by the owners
represented by equity net worth and how much is owned by its creditors
represented by debt total liabilities generally a one to one ratio is
considered healthy anything less is questionable remember keeping the debt
to equity ratio within the healthy one to one parameter is of paramount
importance for example when the debt to equity ratio exceeds one point zero or
one hundred percent such cash training options as adding
inventory hiring new employees and buying new equipment should be put on
hold until the ratio becomes more lender friendly inventory turn inventory turn is the
number of times your inventory turns over in a year you determine the number
by dividing your total cost of goods sold for the year from the P&L by your
average inventory beginning inventory plus ending inventory divided by two for
example if your beginning inventory on January 1st was $100,000 and your ending
inventory on December 31st was $150,000 your average inventory would be $125,000
your inventory turn shows how well you’re managing your inventory the
higher the number the more times your inventory has turned which is always
preferable the number of times your inventory turns is highly dependent on
your industry manufacturer wholesaler or retailer and your role in it
typical inventory turns can range anywhere from 5 to 20 times a year
consult your trade association for inventory turn ratios that apply to your
industry number of days in receivables you
determine the number of days in receivables that is the average length
of time between selling a product or service and getting paid for it
by first computing your average sales day divide your total sales for the
period from the P&L by the number of days in that period for a year
use 365 then divide your average sales day into your current accounts
receivable balance from the balance sheet the resulting figure gives you the
number of days and your receivables generally speaking fewer than 30 days in
receivables is considered excellent between 30 and 45 days is acceptable and
more than 45 his cause for concern yada-yada
is an acronym that stands for earnings before interest taxes depreciation and
amortization ebody is computed by adding back interest taxes depreciation and
amortization to net income those four expenses are non operating expenses so
after adding them back you have a number that represents the pure operating
results of your business the EBIT uh number is always used in
transactions that relate to buying and selling a business in other words
valuing a business managing your inventory the opportunity
is to improve profitability by the efficient handling of inventory are
endless inventory isn’t GRA like marketing or in the future like sales
it’s here today and resting on your shelves available to touch feel and
count as a result if you improve your efficiency at handling inventory your
business can have a double financial benefit profitability the less inventory
you have to write off the more profitable you become cash flow the
fewer dollars you have tied up in inventory the more cash you have in your
bank account aside from texting while driving
accumulating excess inventory is the quickest and easiest way we know of to
get into trouble excess inventory and its long list of hidden Horrors have
turned many a healthy small business into an ailing one unlike getting rid of
employees who aren’t performing you can’t give inventory that isn’t
performing a pink slip and send it out the door nor can you step up your
collection effort with your inventory as you can with slow moving receivables
non-performing inventory just sits there collecting dust and generally
depreciates inventory can disappear in several unsatisfactory ways including
internal theft by your employees external theft by your customers and at
the hands of the most virulent scourge of them all obsolescence if inventory is
an integral part of your small business use the following tips to manage it
effectively gather information on past purchasing and sales transactions
preventing inventory accumulation starts with the person doing the purchasing the
more information on past purchasing and sales transactions that person has the
better his future purchasing decisions can be to gather this information do the
following make sure that you buy the best inventory tracking software you can
afford because inventories past performance is usually the best
indicator of how it will perform in the future a good small business tax
advisor should be able to help you decide which software choice is best for
you if you aren’t computerized ask your accountant to help you develop a manual
system if you plan to enter the retail business make sure that you also buy a
point-of-sale program a system that adjusts inventory as a result of cash
register transactions the system should be sophisticated enough to capture the
information needed for you to accurately track your inventory divide your
inventory into small manageable pieces pay especially close attention to those
pieces where you have the most financial exposure remember inventory is subject
to the 80/20 rule you usually get about 80% of your sales from 20% of your
inventory units pay special attention to closely tracking that 20% make sure that
you have a workable system and qualified employees in place at the inventory
handling corners shipping and receiving most inventory disappearance problems
can be identified at one of these two positions if your inventory system is
manual ask an experienced tax practitioner to help you establish a
workable digital or electronic system take frequent physical inventories to
determine whether you’re having inventory shrinkage problems and if so
how significant they are count the items in your inventory and compare your
physical count to your financial records if you divide your inventory into small
manageable pieces you can more readily determine where the shrinkage is
occurring taking a physical inventory is the only way to ensure that the gross
margin figures on your P&L are correct we suggest that most businesses take a
thorough physical inventory at least twice a year and preferably four or even
six times when selecting suppliers don’t simply settle on the supplier with the
lowest price include delivery time and shipping dependability at or near the
top of your criteria after all the shorter the delivery time
and the more dependable the vendor the less of that vendors inventory you’ll
have to carry some vendors allow returns on inventory you’ve purchased from them
often charging a restocking fee of some sort in most cases a vendors willingness
to take back items that don’t sell is an added benefit assuming that the
restocking fee isn’t too high collecting your accounts receivable
banks aren’t the only institutions in the business of lending money most small
businesses lend money to the primary difference between the two however is
that when banks lend money known as loans to their customers they charge
interest when small businesses lend money via accounts receivable to their
customers they usually don’t charge interest think about it when customers
buy your product unless your business deals only in cash you usually give them
30 days to pay the invoice during those 30 days the customer not only has your
product but also in effect has the cash that’s due you the same cash that you
can otherwise use to reduce your debt pay your bills or invest to your benefit
today’s business culture places the customer on a pedestal as well it should
after all someone has to purchase your products or services but the word
customer is incomplete the correct phrase should be paying customer today’s
successful entrepreneurs know that a customer isn’t a desirable customer
until she has paid the bill the following list presents our time-tested
collection of tips on how to find and do business with paying customers use a
credit application design and use your own credit application ask one of your
vendors if you can use its application as a simple make sure that every
potential customer fills one out before you ship an order or provide your
service the credit application you use should include among other things the
customers references other vendors used by the customer the name of the
customer’s bank the person responsible for accounts payable and the name of the
owner president/ceo the person ultimately responsible for the customers
debts and be sure to check the references provided in the application
evaluate every applicant ask yourself these questions about every prospective
customer who submits a credit application and
the answer to any of these questions is no feel free to wave goodbye to the
prospective sale does this applicants have the ability to pay has she
indicated by her past actions a willingness to pay on time can you make
a reasonable profit on sales to this account ask for a financial statement
don’t be afraid to ask for a financial statement before shipping to a
first-time customer can you imagine a bank lending you money for your business
without first asking you for a financial statement check credit you can bet that
your good vendors check your credit you should check your customers credit to
remember that the granting of credit is a privilege in fact you’re lending money
to the person requesting it grants credit the way banks do with care
establish terms no sale should be made without first establishing credit terms
terms should work for both parties but remember your signature on the bank’s
guarantee when a customer wants you to carry his receivables for long periods
of time your bank won’t back off its terms why should you managing your accounts receivable every
successful small business needs someone dedicated to the collection of accounts
receivable in the early stages of the business that someone is almost always
the entrepreneur or founder in later stages that responsibility may be
delegated to a bookkeeper controller or chief financial officer CFO but whoever
that person happens to be he must be passionate about collecting
the money’s do the business after you’ve properly established your accounts
receivable record-keeping functions you need to figure out how to manage them
the following tips can help you do just that Bill promptly bill the same day you
ship or in the case of a service business the same day you fulfill the
customer’s order or the terms of the contract if you wait until the end of
the month to prepare and/or mail invoices you further increase the number
of days before you’ll receive the cash track the time it takes your customers
to pay their bills you need to age all outstanding
receivables at least once a month in other words you need to compute the
number of days that every receivable has been outstanding companies where money
is tight generate aging lists every day creating an aging list reminds you who’s
in control of a large amount of your company’s cash an acceptable age of a
receivable in most industries anyway is 30 days danger signals should appear
after a receivable exceeds 45 days begin collections promptly don’t wait until
your receivables are more than 90 days old to kick in your collection
procedures do so while the invoice is still warm no more than 45 days utilize
a carrying charge or interest charge why shouldn’t you charge interest on
overdue balances after all you’re expected to pay a carrying charge to
many of your vendors when you exceed your payment terms review your credit
card agreement if you have any doubts on this one don’t charge anything less than
10% annual a relatively high interest rate will
ensure that you get the overdue accounts attention don’t ship to non payers don’t
continue to ship to customers who don’t pay in accordance with your terms
involve the boss consider picking up the phone yourself when the bill paying
stalling becomes noticeable a call from the owner or boss may be more effective
than a call from the bookkeeper use a collection agency only as a last resort
collection agencies are expensive charging up to 50% of the receivables
for their services also collection agencies aren’t known for their
consideration and politeness be prepared to kiss your customer goodbye forever if
you choose to hand your slow paying accounts over to an agency remember your
accounts receivables represent cash and cash is the ultimate measure of your
business’s liquidity liquidity is the first place lenders and investors look
when appraising the health of a business make sure that your receivables are
current before showing your financial statements to people who have a reason
for reading them every small business owner spends a
significant amount of time trying to increase the business’s profitability
the difference between revenue the money you take in and expenses the money you
pay out no one succeeds in increasing profitability all the time no matter how
hard he tries some succeed often enough to grow a small business into a larger
one some succeed just often enough to survive and unfortunately some don’t
succeed at all remember the three ways to increase your business’s
profitability are to decrease expenses to increase gross margin to increase
sales you can do all three at the same time that is if luck and the time you
have to devote to the task are on your side however our advice would be to pick
the easiest option first decreasing expenses then proceed to the second
easiest increasing gross margin and then finally to the toughest increasing sales
unfortunately too many entrepreneurs start with the sales option first
afterall increasing sales is more fun than cutting expenses while we applaud
their gusto they’re approaching the process from the wrong end and won’t see
the same immediate results they’d get if they started with expenses instead of
proceeding by trial and error you can use a thorough understanding of how
these profitability improving options work to determine exactly what to do
when your profits aren’t what they should be the biggest advantage that comes from
decreasing or controlling your expenses is that expense cuts generally have a
direct and short-term impact on the bottom line for every dollar you save by
cutting or eliminating an expense you earn an extra dollar of profit sure
increasing sales is another way to increase profits but an extra dollar in
sales may bring in only 25 cents of profit we explain more about that
shortly of course not all expense cutting is equal it’s one thing to cut
your expenses by changing your internet service provider but if that change
results in slower service does it make sense where lower costs involve lower
quality the result of that lower quality needs to be factored into the decision
so although were strong advocates of operating a lean business you must be
thoughtful about where and how you reduce your expenses you need to
consider all the effects of cost-cutting not just the short-term bottom-line
effects before you make any cuts remember controlling expenses is a
cultural issue which means that it’s a lead by example issue that begins with
you the business owner and carries over to your employees presuming that you’ve
hired the right ones from the day you open your business’s doors you must pay
close attention to managing its expenses being careful not to spend money
carelessly and being tactfully critical of those who do if the boss sets the
right example the rest of the company is certain to follow that’s how a company
culture is established and flourishes zero based budgeting after you determine
what kind of expense controlling culture you want to set up in your business and
then make the commitment to act accordingly your next step is to
introduce a zero based budgeting program zero based budgeting requires that you
begin each year’s annual budget process by setting each expense category at zero
in other words you don’t assume that the dollar amounts in the preceding years
expense account were needed you question every dollar that went into that expense
account the zero based budgeting approach contrasts with the way many
businesses budget expenses most businesses add a percentage increase to
the preceding year’s expenses with the rate of the prior year’s inflation
increase being the most frequently used common multiplier if last year’s
inflation rates was three percent for instance many businesses just plug in
three percent increases to arrive at this year’s budget the primary advantage
of budgeting by the percentage increase method is that it’s quick and easy the
primary disadvantage is that it carries last year’s fat into this year’s menu
ditto with next year’s menu and so on forever unless that expense category is
eventually thoroughly questioned through the zero based budgeting technique
here’s an example of how zero based budgeting works suppose it’s time to
budget your telephone expense for the year the quick and easy solution is to
take the preceding year’s telephone expense figure AB three percent or
whatever inflation is and move on to the next line item on the P&L however the
zero based budget our job is to examine and evaluate the company’s telephone
needs to determine what kinds of calls need to be made and then to contact
alternative carriers collect quotes on their services and award the business to
a less expensive but comparable quality provider often the additional time you
spend budgeting will be rewarded with a decrease in expenses as opposed
to an inflation based increase trimming costs in addition to zero based
budgeting effective control of expenses requires understanding the 80/20 rule as
it applies to expenses the 80/20 rule maintains that you can usually find 80%
of wasted expense dollars in 20% of the expense categories as you create your
budget challenge expenses in all categories large and small you can
usually find quick and easy dollars to save by rooting around in such
overlooked expense categories as utilities travel and entertainment
insurance and the compost heap of them all the miscellaneous category the
following tips provide a framework in which you can effectively control your
expenses avoid over staffing finding and hiring a good employee is costly and
after you’ve hired one unhireable t’ but also expensive use outside contractors
temporary services and part timers if you’re on the fence about the need to
hire a full-time employee automates where possible technology is usually
cheaper than people and it can be depreciated when possible and when doing
so won’t compromise the quality of your products or services purchase software
in lieu of hiring additional employees functions such as accounting inventory
control accounts receivable and payroll lend themselves to automation don’t wait
until a crisis arrives to do something about your expenses institute an expense
control program when things are going well you don’t have to wait until the
roof caves in be motivated by efficiency not by fear put the responsibility for
controlling expenses where it belongs in the hands of the employees who spend the
money also make them accountable for their actions reward them when they meet
their goals and provide corrective feedback when they don’t that’s
management 101 the preceding tips are intended to provide you with an overview
of how to control your expenses following are several cost controlling
measures intended not only to give you specific ideas but also to put you in
the frame of mind for getting serious about managing your expenses ask for
price quotes before you obligate yourself to services this is true for
everything from lawyers accountants and financial advisors to computer repair
people plumbers and consultants often the quotes won’t hold up but they’ll
give you a basis on which to negotiate subsequent charges also make sure that
you always ask for itemized invoices don’t pay unnecessary bank charges
question the fees on your statements shop around if your bank is charging
more than competitors for services just about everything is negotiable including
bank charges shop your telephone service every year or so everyone is discounting
telephone services as technology and deregulation make prices more
competitive if you have employees review your experience modification factor with
your insurance agent your experience modification factor is the tool that
determines your workers compensation insurance payment speaking of insurance
agents how long has it been since you’ve shopped for insurance both liability and
health given the relentless upward trend of health insurance and the seemingly
endless changes in the health care system our recommendation is that you
annually price your business’s health insurance policies and compare those
prices with other policies out there we’re not suggesting that price should
be your only consideration or that after you’ve found a lower price you should
automatically wave goodbye to your current supplier rather we’re suggesting
that you be aware of the going rate in the marketplace and where appropriate
either change suppliers or press your current supplier to reassess the prices
it’s charging you squeaky wheels get the grease and the effective control of
expenses is no exception to this rule the preceding tips or
a few of the many possible ways for you to control your business’s expenses
remember that effective expense control isn’t a one-time event
it’s an ongoing occurrence whose success or failure lies entirely in your hands increasing margins as we’ve mentioned
margin is the difference between sales price and the cost of the goods or
services sold gross margin is the accounting term you see on the balance
sheet to mean the same thing here’s a simple illustration of how to understand
what the margin is on a given transaction if your product sells for
fifteen dollars and the cost of that product including shipping charges is
ten dollars your margin is thirty three percent the five dollars in markup
divided by the fifteen dollar gross sales price your margin dollars are five
dollars the difference between the ten dollar cost and the fifteen dollar sales
price remember you can increase margins in three ways by raising prices by
lowering the cost of the goods or services sold by doing both regardless
the magic of increasing margins is that similar to decreasing expenses every
dollar of income derived from the margin increase ends up as additional profit
assuming no reduction in sales continuing with the preceding example if
you raise the price of the product from $15 to $16 the margin jumps from 33% to
37.5% and the margin dollars increase from $5 to $6 because increasing prices
generally costs very little nearly the entire one dollar of the price increase
will be realized as profit again assuming no reduction in purchasing from
customers increasing margins by lowering the cost of goods or services sold is a
little more difficult if you’re a manufacturer you must decrease the cost
of manufacturing your product either by cutting your labor costs or by reducing
the cost of the raw materials you purchase from vendors if you’re a
wholesaler or retailer you must reduce the cost of the goods you purchase for
resale similar to reducing prices this method of increasing margins also
results in a dollar on the their recapture of profitability
consider the case of the small business that does $500,000 in sales a year if
the owner at the beginning of the year decides to increase the prices of his
products by an average of one percent that would mean an additional five
thousand dollars in profits at the end of the year an average increase of two
percent would add ten thousand dollars and five percent would add a solid 25
thousand dollars again all this assumes that the price increases don’t reduce
sales generally speaking small business owners
are more reluctant to raise prices than they should be to many times
your humble authors have witnessed reluctant small business owners tremble
in the course of reasonably raising prices only to learn that their
customers don’t care as long as the quality of the relationship indoors the
tolerance of your customers to accept price increases depends on such issues
as competition alternative products and most of all the customer relationships
you maintain we strongly recommend that every small business owner review the
margins on every product or service at least once a year
determine a time of the year when raising prices makes the most sense
usually at the beginning of the business’s fiscal year mark that date on
your calendar in Inc and when the time comes
start with your lowest priced item and work up analyze the percentage of price
increase on each individual item don’t simply increase prices by using an
across-the-board percentage increase also be sure to aim for higher margins
on the lower priced items those that aren’t as likely to be price shopped by
your customers and on those products that don’t need to be as competitively
priced but realize that you don’t have to wait until the end or the beginning
of the year to consider increasing your prices you may want to consider a price
increase when the demand for your product suddenly increases perhaps a
competitor has raised its prices or perhaps the law of supply and demand
hard at work in other words maybe more demand than supply for the product in
question can provide a perfect scenario for raising prices don’t feel guilty for
taking advantage of such situations you’ll encounter plenty of occasions
when the law of supply and demand works in Reverse and you must cut your prices increasing sales after you have
decreased or controlled your expenses and increased your margins you can now
focus on doing what every entrepreneur worth her weight and loan guarantees
loves to do increase sales afterall increasing sales is what most small
business owners are born to do and besides offense increasing sales is
always more enjoyable than defense cutting expenses everyone loves to roll
out a new product hire a new sales person it’s usually more fun to hire a
sales person than it is to hire a bookkeeper or develop a new sales
promotion what’s more you can easily measure the results of a plan to
increase sales in most cases the operative word here being most the act
of increasing sales adds profits to your bottom line if those sales are priced at
a high enough level to make them profitable we stress the word most here
because small business owners too often attempt to solve their profitability
problems by focusing only on increasing sales what they fail to realize is that
if their sales aren’t made at a price high enough to generate a profit then
adding more sales will only serve to increase their cumulative losses or
stated another way sales alone don’t beget profitability only profitable
sales do you

One Comment

  • get 2 FREE months of unlimited access to over 18,000 online classes, try out skillshare | (affiliate link)

Leave a Comment

Your email address will not be published. Required fields are marked *