Business owners don’t always have the time, tools, or resources to gain the critical financial insights to manage cash flow and grow their business. Here are three important considerations to help you better understand your numbers and grow profits this year.
1) Think of expenditures as assets
It’s common for business owners to think of expenses as negatives. Conservative accounting rules require such treatment. You’ll look over a list of expenses and think, “How can I cut some of these out?” But that kind of thinking can lead you down a dangerous path. When an expense helps improve your efficiencies, or builds future revenue or margin, it is in fact enhancing the total value of your business.
Let’s say you and your staff have to attend conferences regularly. Industry events let your salespeople connect and close deals, and cutting back could damage sales. You also continuously invest in training your sales force. If expenses help you increase efficiency and contribute to profits, you need to think of them as assets you leverage to build a rate of return.
2) Create a smart budget
Smart budgets don’t just tell you how much you have to spend, they tell you what you can afford moving forward. You need to know how much money to set aside to reinvest and in what.
To create a smart budget you need to know your break-even point, contribution margin, and cost relationships. You can wrack your brain with spreadsheets trying to figure out how much additional profitability that extra $5,000 in sales will bring. To create a smart budget you need to account for seasonal expenses too – like energy in the winter or tax season accounting work.
Building the value of your business is not just about where you are going, but also what it will actually cost you to get there.
3) Know when a strategy is working, and when to pull out
Especially for newer businesses, some strategies will inevitably go awry. A failed strategy does not have to mean a failed business – as long as you know when to pivot or pull out.
When putting together a new business strategy, most business owners attach certain costs to it: product costs, marketing budgets, equipment, and professional services. Then they define a set of assumptions like “we’ll have $150,000 in sales,” or “it will take 12 weeks before we start to hit the expected performance level.” You need to be clear about the costs associated with those assumptions and what you can afford to spend based on budgetary projections. You also need a “red flag” for when to pull out. For instance, you may want to try a new marketing strategy and know it’s time to move on when it eats up more than 25 percent of your profitability.