An Approach to Improved Profits
A perfect guide and ingredients to success recipe to get the best out of your business.
- Introduction to Profit Making Approach
- Having a Competent System
- Your Financial Statements
- Understand & Control your Expenses
- Budgeting and Planning
- Manage Receivables and Avoid Bad Debts
- Management Dashboards
- Rely on Updated Financial Records
- Manage your Receivables Effectively
The small business owners usually fail to understand their businesses financially so they lack to pay attention to financial performance and profitability of their business.
These guidelines will not only help you understand your business financially but also giving you good news on increased profits and opting for new ventures in future as well.
Having a Competent System
If you’re not good at keeping updated accounting records you’re most likely living in dark.
There are 2 options only, keep your accounting records yourself or hire some professional accountant or bookkeeper. Well hiring a full time accountant or bookkeeper has always been dealt with delayed decision, so in order to ease your pain read article Accountant Vs. Bookkeeper.
The most updated knowledge of your business affairs will enable you to take necessary decision at the right time.
There are three main components of financial statements which as a small business owner are crucial for you.
- Balance Sheet, Profit & Loss Account and Cash flow
Balance Sheet: Balance sheet gives you a snapshot of your assets, liabilities & equity. If your liabilities exceeds assets then your business may face problems in terms of insolvency. Balance sheet is most difficult component to understand for a beginner.
Profit & Loss Account: Profit & Loss account shows business performance of a selected period and its easier to understand. Its just difference of your Revenue and expenses and quite self explanatory in nature.
Profit and loss monitoring, reporting should be monthly so that trends and results can be compared with previous months and also with previous years.
Cash Flow: Upon reviewing Cash flow the key factor to be kept in mind is your cash revenue and cash expenses incurred from where you can easily plan your future cash inflow and outflow. Having cash flow data for past months on a sheet can help you plan and react any possible crisis before-hand.
Understand & Control your Expenses
Business expansions are great thing to do which most of times are initiated by the successful business owners.
But meanwhile expansions do have a watch on business expenses because once expenses increased its very hard to control them, because uncontrolled expenses are profit eaters.
There are two types of expenses:
Fixed expenses are those expenses which remain unchanged over, the best example of such expenses are office rent, monthly costs of office maintenance etc. these expenses remain constant whether the sales is zero or in millions.
Variable expenses change (increase/ decrease) with turnover of the organization. For example if you’re a manufacturer your raw material will increase with increase in sales demand.
Cut short you have to keep an eye (analytically) on your expenses. For example if your expenses have increased for period you should be probing the increase. You should be aware of variations in expenses (variable expenses) to sales so that in case of huge variations preventive measures can be taken in time.
Budgeting and Planning
Budget and plan before you spend, of course monitoring is much more important than preparation of your annual, bi-annual, quarterly budgets. Making unplanned decisions can cost you business.
In order to prepare effective budget & planning, consider your profit & loss account and cash flow projections for the next planned period. Institute budget for your expenses expenditures, capital expenditures most importantly your marketing activities.
Setting your sales targets motivates your sales and marketing team, similarly your marketing activities are linked with your sales figures.
Budgeted expenses keep the company cash flow in line with its needs for capital expenditures which are huge in amounts so if the capital expenditures are synchronized with cash flow then you can easily avoid cash flow crisis.
Finally monitoring your budgets, by comparing your actual results with the budgeted will give you plan effectively for the next periods and promising profits.
With Budgeting Vs Actual, you cannot repeat your previous mistakes / shortcomings. On the other hand profits can me optimized and expenses can be minimized.
Manage Receivables and Avoid Bad Debts
Small business owners usually prefer to make all their sales on a cash basis and due to this inclination the Business Owners may lose their business or couldn’t make the very good out of it.
We are living in is a credit-driven era, where organizations have sound credit policy and draw guidelines to manage receivables.
Sometimes things go wrong when you’re selling on credit, there are good customer and bad customers.
Bad Debts are really bad! These are your sales which you have already recorded with a hope of receiving the cash in future. As every business runs on anticipated cash flow, every single dollar has already been assigned either with an expense or owner’s drawings. When a customer goes bad and does not pay at all, small business often cannot easily digest this hit.
As a small business owner you should always keep the following handy: –
- What is your sales trend?
- What are your profit stats over the period of last 6 months?
- Current business cash flows?
- Money owed to you and money you owe?
- Past trend of profit/ loss associated with projects?
Imagine yourself sitting in middle of a meeting and about to make key decisions as to the future of your organization and surrounded by the Customers/ Vendors or their business partners what would be the best thing you should be having in front of you? Of course your “Management Dashboard” to keep you informed about the facts about the financial position of your company/ organization.
There are a lot of Online Accounting Software companies which have designed Online Management Dashboards for Small Business Owners.