Entrepreneurs open businesses for many reasons, but if they want to stay open, their primary reason for opening the doors should be financial success. As a business owner, do you know if you are truly achieving this goal? Sure, you may be making money, but do you know if you are truly successful financially? Most entrepreneurs think the answer to this question is “yes”. I hope you’re right. But just to be sure, let’s dig in a little deeper into this question by asking other questions…
When was the last time you evaluated your expenses?
When your business starts making money, your tendency is to start spending more on things you may not actually need. This is why it is important for you to continually evaluate your expenses. Did you know you can substantially increase your profits simply by cutting your expenses by 12.5 percent? So how do you cut expenses? First, you need to create a chart of accounts. Then, you need to track month-to-month how much you are spending and where you are spending it. Once you are able to trend your expenses, you can identify places where you may be able to save money as well as identify places where your spending may be out of control.
What financial statements do you use?
Every business is different, and the types of financial statements you evaluate to determine your success may vary from the statements other businesses use. At bare minimum, you should be keeping up with three statements:
- Profit and Loss Statements (P&L)
- Balance Sheets
- Cash Flow Statements
When evaluating your P&L, it is important for you to understand your net income amount is not real. Rather, it is a number accountants and the IRS use, but it does not reflect the true money made or spent in your business. Why? This statement does not include principal on loans, and sometimes, it does not include owners’ salaries. Additionally, your cash flow statement will not list all your expenses. That is why you need to evaluate more than one financial statement. Your financial statements should include all money that comes in or goes out for normal operations of your practice, allowing you to see the true bottom line of your business. For example, a P&L may show a profit of $15,000, but when you add in principal on loans or owner’s salaries, your true profit may be a negative number. This means you should not make distributions on a profit of $15,000 because you truly do not have that amount in your bank account.
What is your spending plan?
Every business has expenses that happen once a year. Don’t let your business’ bank account be surprised when those expenses arrive each year. Instead, create a spending and savings plan for them. Calculate what you spend on average over a 12-month period for all your big expenses. Then divide that amount by 12 and put that amount away monthly into an account specifically for those expenses. This will help with your cash flow and ensure there is not one month where your business is hit harder than another month. By following these simple steps, you will be able to evaluate your business and determine the pace you are able to grow your business. These steps will also help you answer the question, “Am I really financially successful?”
Living Every Minute,