No matter the size of your business, from a high-traffic bricks and mortar to a home-based Etsy store, there are always ways that you can be handling your business finances better. No matter what your profit, these are the major money mistakes you can make – and how to fix them. Over the next few weeks, we will discuss the different mistakes and how to correct them.
Something that people forget when they start a business is that business is a lot of work! Not only do you have to produce your goods or perform your service, you also have to track the business of your business. There are a lot of numbers that you need to keep track of in order to determine how your business is doing.
Here are some of the basic numbers that you should know when you are taking stock of your business:
- Average Revenue By Month: In order to determine how well your business is doing, you should be able to know what your average monthly revenue is. This is how much money you bring in on average in any given time period. If you know that the holidays are your biggest season and you do absolutely no business in April, this is important. This helps you plan purchases and know when you won’t be bringing in any revenue (or potentially a paycheck). This also helps you forecast what inventory you will need prior to orders. Historical information is always key to a thriving business.
- Gross Profits: You should know how much you will make on any given item or service. If something costs $3 to make and you sell it for $10, your gross profit is $7. If you don’t know this information, it is time to pull out your receipts and purchase orders to figure out how much your products cost to make. If you are service based, do you require special software or tools to perform your service? How much do you need to assign to each client based on use?
- Working Capital: Working capital is defined as current assets minus liabilities. Simply, current assets are anything that can be quickly converted to cash – Accounts Receivable, Cash on Hand, Inventory, etc. Liabilities are anything you need to pay, Accounts Payable, short term debt, etc. Both comprise money that can be “called in” or paid out within one fiscal year. You need to know how much money you would have if you liquidated your assets to pay any current liabilities. That number is your working capital. If it is a negative number, you are running your business at a loss. Which is bad.
- Operating Expenses: You need to know what it costs to run your business before you produce or sell anything. Do you have expenses for rent, websites, machinery, etc.? What does it cost monthly and yearly to just put yourself out there in order to sell your product or service? Total all the monthly and yearly charges to figure out what these numbers look like. Group them by class, such as marketing, general and administrative, salaries, etc. These should be easy to access and help you plan how to price your goods or services and to determine what your true net profit really is.
If all of these numbers and dollar amounts seem foreign to you, it would probably be good for you to take the time to learn what they are in depth. You should have some type of bookkeeping worksheet or software (I love Quickbooks Online for small business). There are some great business finance books available and you should be able to ask your CPA to get more information on any business money topics.
Remember, businesses only thrive when you have the right foundation. Having a clear picture of your numbers is a great step in creating that foundation.