If not to make a profit then why are you working so hard?
The most common question about profit asked by small business owners is: “why when my books show that I made a profit don’t I have any money in the bank?”.
Do you know where your money went? Being fully familiar with your financial statements is often the missing knowledge to managing profitability. It sounds, basic yet so many business owners are not comfortable with business finances or math for that matter. If this is you, I get it, keep reading, I wrote this for you!
Business is math
Now is a great time to revisit lessons learned from our Grade 7 math teacher. Around this time we were introduced to fractions, we learned about balance. 1/2 = 2/4. Our own business financial statements are balanced. They will tell us if we are not charging enough, or if we are not selling enough. Even if we sell more, our companies may not be profitable if our expenses do not support the delivery of the sold product or service.
Creating a profitable business is simple math. Money in, plus or minus money out, equals profit or loss. Let’s focus on being profitable, and that starts with knowing our numbers.
Know your numbers
The best way to create a profitable business is to know your numbers and make informed decisions around product pricing.
Back in 1997 when I owned a travel agency, the airlines in all their wisdom decided to reduce our commissions down to a maximum of $50.00 per transaction. This resulted in a seventy percent drop in revenue overnight. Some agency owners were still discounting their commissions and if they continued would be paying their customers to buy from them. The ones that only looked at their financial statements once a year were out of business within months.
For us, we knew how much we needed to recover in user fees to make up for the lost revenue and immediately switched to a fee-based service system resulting in higher profitability by eleven percent.
So where did your money go?
If you have earned a profit and you don’t have any cash in the bank, you will find your money on your balance sheet. Somewhere on that document, you will find either additional inventory, accounts receivables, or an equity amount for that shiny new machine you just purchased. Get your books up to date and find someone to help you understand your financials. Then you can start adjusting your prices and expenses, including staff to ensure there is a BLACK number not a RED one at the end of each month.
Design your financial strategy from the bottom of your income statement up, using your desired profit amount as the first important goal. Only then can you make decisions around hiring, buying, pricing, discounting, revenue sharing and growth based on keeping your eye on that magic number that says you are making money.
You can have a profitable business!
Your financial statements are the key to a profitable business. The more familiar you are with them, the more control you will have over your finances. If you need any help, reach out! Your accountant or business coach can help you.
Until next time, enjoy your Entrepreneurial Journey!