Steve is a successful business owner who takes his business very seriously. He focuses on growing his business and has several employees. People love his products and services and are sharing them with others. What Steve is struggling with is making his business financially fit. It seems like his business is always tight, and he is barely making it each month. Sound familiar?
This is what we hear from many business owners. They want to grow and be successful, but they are missing some tools to assist them in staying profitable. Here are four tools you can implement into your business to be financially fit.
1. Know Your Overhead Cost – It is easy to know what the cost is of each product or service you sell, but many business owners fail to include their overhead cost when figuring their numbers.
Profitable businesses know what their profit is on each product or service after their overhead cost is included. Overhead costs often include, administrative expenses like office supplies. Other expenses may also include marketing and advertising, employee related, facilities and equipment, vehicle related expenses, insurance, and tax related expenses.
Companies should know the percentage of breakdown related to each product sold, each procedure or job performed, or each service that is provided.
This allows the business owner to price their products and services at the right price. If the overhead cost is not included, it can cause the business to lose money on each sale that they are making.
2. Manage Your Cash Flow Regularly – Cash flow is so important for a financially fit business. If a company does not have a good eye on their cash flow, it can cause them to struggle every month.
Knowing what money you have coming in, and what money you have going out each week and each month will help you to know what you need to bring in each week to manage the bills that are going out.
It will also assist you with meeting goals like buying that piece of equipment that will make you more profitable or investing the money to increase overall profitability. Look at a statement of cash flows; a statement of cash flows will show you what money is coming in and what money is going out each month.
3. Pay Attention to Your Numbers Each Month -Waiting until the end of the year to get your bookkeeping in place for your tax accountant can be a very costly mistake. A financially fit business pays very close attention to how the business is doing on a weekly and monthly basis.
They know how much they need to make each week in order to be a profitable business. They also look at their financials each month to see what they need to do in order to improve the next month overall performance.
If a company fails to do this, they have no way of making important business decisions because they don’t know where they are at. Not know where your business is at will cause your business to fail. If a business isn’t growing, they are dying.
4. Know Your Financial Ratios – Many business owners don’t know what business ratios they need to track in order to be profitable. Knowing the right ratios can help a business owner know what decisions they need to make to move their business in the right direction.
As an example, one of the ratios that a business needs to track is the current ratio. This ratio will help them track how healthy their business is. A healthy business will have at least a 2 to 1 ratio, so $2 in assets for every $1 in liabilities. If the business is carrying inventory, it is important to have a 4 to 1 ratio.
To determine the current ratio, take the current assets and divide them by current liabilities (Current Assets/Current Liabilities.) Once you have the current ratio, it can be tracked each month to determine if your company is moving in a good direction or if you need to make some changes in your business to move it in the right direction.
Implementing these tools into a business can make a huge difference on how profitable a business is. A small hinge on a gate can help a large gate swing back and forth, just as a small step in the right direction can make a huge impact on a business.
If you are not sure where to start, contact Professional Accounting Services at 801-756-8886 and we can assist you with making your business profitable.