PROFITS AT A GLANCE
Sooner or later, all small businesses, even the most successful, run out of room to grow. Faced with this unpleasant reality, they are compelled to reinvent themselves periodically. The ability to pull off this difficult feat—to jump from the maturity stage of one business to the growth stage of the next—is what separates high performers from all the rest.
The potential consequences are dire for any small business owner who fails to reinvent his or her business in time. Once a small business runs up against a major stall in its growth, it has less than a 10% chance of ever fully recovering.
And there’s no shortage of explanations for this stalling—from failure to stick with the core (or sticking with it for too long) to problems with execution, employee performance issues, marketing issues, misreading of consumer tastes, or an unhealthy focus on scale for scale’s sake. What these theories have in common is the notion that stalling results from a failure to fix what is clearly broken in a small business.
Therefore, we can logically conclude that all small business owners must confidently know where they stand on the growth cycle, how close they are to stalling and stagnation and the impending doom that often follows that unhealthy situation.
WHAT TO DO ABOUT THIS
Simple. A periodic assessment of profitability and growth is a “must do” for all small business owners. It only takes a few minutes.
OR, EVEN BETTER
Why not know exactly where you stand with profits and profit margins–daily–at a glance…so you can make timely improvement plans with accurate data as you go through the year instead of waiting till some future date to get the story and perhaps then need to fix things in a hurry up panic mode. Early intervention is better than late intervention. Knowing your profit margins on everything totaled per day and your profit margins on each transaction is very helpful. Track that, then every day you can quickly look and know your profits on every single transaction, the day’s total transactions, and all annual transactions. Very useful indeed.
Here’s how to do this. Calculate profit on every transaction and add up the total each day: income from all daily sales minus costs of goods sold including labor costs for each transaction equals daily profit.
Then tackle all your operational expenses. For expenses, amortize every one expense item down to a single day. Amortize simply means take your annual costs and divided them by 365 days. This gets you a daily cost number for each expense.
What to amortize: Amortize all your insurance costs (liability, fire, health, etc.). Then take all taxes paid in the year and amortize that number down to a per day expense, (you can base this calculation of the on previous year payments). Amortize your mortgage or rent payment if you have those, plus membership dues, utilities, licensing fees, work related travel expenses, and everything else you have. Amortize your marketing and advertising expenses too.
You can start doing gathering all this information from Schedule “C” of your income tax return. Just take all the regular and normal expenses in each of the business expense categories listed there and divide them by 365, and you’re done it. Obviously if you bought anything unusual, like that $65,000 pickup truck that you paid cash for last July, remove that decidedly not regular and normal item so that your results are not skewed. Jake the truck out of there. Use only regular and normal expenses.
Once you have all this worked out, which, yes, will take you awhile to set it up, but then at the end of every day, you will know exactly what your costs are by category and in total – and what your profit on every transaction is – and what your profit is for every day you are open for business.
You can make this profits per transaction calculation per day, per week, per month and per year. And you should, as that will give you a complete and accurate picture of where you stand. Armed with your full and complete profit picture, you can make improvement plans based on accurate and timely data. Good idea huh!
Track daily profits per transaction for 2 weeks. Then analyze the data. Decide if you are happy with what you see. If so, keep things going as they are. If not make some changes. Decide what prices changes you ought to make on what items or services, what to stop selling perhaps, what new offerings you might want to carry, what adjustments to your marketing are in order, what changes to staffing you might try, etc. Don’t neglect your accounts receivable if you have any of those. Are there some collections strategies you ought to employ, some proactive phone calls to make and so on.
Indeed early intervention is better than late intervention. And armed with accurate and timely data, well, then you know what to do.