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  • Thoughts on Increasing Profitability

  • As a business owner, do you ever wonder where all the money you earned went? It seems like there should be enough coming in, yet month after month it seems to evaporate. The best and quickest way to get control over where your money is to make (and then stick with) a spending plan. This is different from a budget because of the way it is set up and the way you implement it. This article focuses on the creation of the plan, which would be similar for any business.

    You start with the end and work backward. This means rather than listing all the expenses to build a budget and let that determine how much money you need to bring in, you flip it: start with how much income you expect to earn and THEN construct your plan.  Here are the steps to do this:

    You have $xxx of income. First, and I ​do mean first - set aside a certain percentage that will go in an account towards quarterly or annual taxes. Set aside another percentage that will be your take-home pay from the business. This is crucial because you must have money to survive and it is much less sticky that mingling personal and business funds. It doesn't have to be a lavish amount, just enough that you won't have to borrow from the business. A third pot that needs to be established before looking at expenses is a savings account. This needs to be a percentage (and again, it can be small) to start building a nest egg to be prepared for increased prices from vendors, an unexpected loss of revenue, and any other emergency. Truly, starting with even $10 or $25 per month is better than poo-pooing the idea and having nothing accumulated when the inevitable happens.

    The top spending, which will be for taxes, paying yourself, and emergency preparation, needs to be a percentage rather than a fixed amount of income. Most businesses have a natural ebb and flow with some months earning significantly different amounts of revenue. Setting a percentage of what you expect to bring in gives the spending plan the flexibility to continue forward progress in these areas regardless of cash flow.

    Then, focus on expenses - What expenses are non-negotiable and set? Which are nice-to-have but not absolutely essential? Have any of the nice-to-have but not absolutely essential expenses have resulted in verifiable increased business (in either clients or profit). If so, dig deeper to determine if the expense or income earned is greater to determine whether or not to add to the plan now or save it for later when the business can better afford it.

    ​Keep that final number in mind - if the necessary expenses are exceeding the amount available, there are two choices - find more items that you THOUGHT were non-negotiable/must-have expenses and think creatively about how to trim them, or figure out a way to earn more. Neither choice is easy, and sometimes it helps to have an objective eye look things over. Find a finance-savvy friend that you feel comfortable sharing that level of private information with or schedule a session with a professional offering such services (such as myself).

    ​If you are in the fortunate position that your income is still larger than the must-haves, there are some delicious choices awaiting you:  you can add in some of the want-to-have items that will make your job easier or more enjoyable, you can bump up your emergency savings, you can bump up your personal salary, or create a combination of these ideas. 

    ​It is a good idea to meet with a financial professional at least once a year to tweak these accounts and have an objective eye spot places where your amounts could be maximized. If your business is growing rapidly, schedule these meetings once per quarter. 

     

  • If this is something you would like to chat with me about, please reach out. This is my jam!