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Small business owners are a special breed of people. Our work isn’t a job; it’s a way of life. A passion. Whether you’re a landscaper, salon stylist, restaurant owner or business coach, you do it because you want to build, not just do.
We know we should work more on our business than in our business. But how much do you work on getting out of your business?
How can you ensure you are building enough wealth for life after you’ve decided to sell, lease, gift or close the business you’ve worked so hard to build? Understand the value of your business!
The path to your endgame will not be straight. Twists, turns, ups, downs. It can be a lonely, rewarding road.
Along the way, take time to stop and count and smell. Not your blessings and roses – your money. Your profit. The real reason you are in business. And your debt.
Understand the value of your business – your profit and where it goes
The SCENT of money can be found in five numbers that you must know and understand. Every month:
- Net Profit
Let’s explore each in a bit more detail and talk about why you should look into, and not just at, your income statement.
The top line. You know what the monthly number is, but do you know why? How many new customers did you get? How many did you lose? How much more of the same stuff did they buy, or did they buy a greater variety of services? How did you get them? How long did they stick around? These questions point to the value you provide and to whom.
You should also go beyond the total and make sure your accounting reports them into multiple products and services, sales channels, customer types or other breakdown that makes sense for your business.
Cost of goods/services
The cost of your sales should be recorded and reported into the same groups as your sales. Otherwise, how can you know which customers, segments, projects, etc., are profitable? You have to be able to know what costs are for each product and service so you can align pricing and gross margins. Today’s inflation makes this mandatory!
Ah, the spending reported each month in a list of 20, 30 or 80 accounts, presented in alphabetical order. Besides the total, the list tells you nothing without more work. At a minimum, your accountant should provide a sub-total for accounts that are about the same each month (fixed) and which change each month (variable). And each account should also be assigned to a group of similar accounts so you can quickly review group expenses and see which are up/down. You must understand why so you know what to do.
The bottom line. Profit. “The Sales You Didn’t Spend.” Your accountant may tell you how much you made, but it is certainly not what you get to keep! Roughly 25 percent should go to:
- Fund continued growth
- Save for a rainy day or future recessions (hint, hint)
- Pay more to yourself or other investors
- Pay government
You work hard for your money, so keep more of it! There are many strategies small business owners can use to reduce their taxes. Especially when your annual taxes exceed $25,000, consult a true tax expert. It’s the quickest way to put more money into your own future.
Stop to smell the scent of money and count the cents you sold, spend and kept. These five numbers can give you the confidence to know what drives your business and where your final endgame can take you. Take the time beyond just the current month. Learn to understand where you’ve been (your trends). Learn what to expect in the future (your forecasts).
Your income statement is an important summary of your business performance. To get the most from it, you need to understand the details. And you need to understand how it can mislead. And there are other numbers you should look at.
Debt trumps profit
Profit is important to your business. Obviously, things get challenging without it. But accumulating debt faster than accumulating cash is a greater risk for your future. Notice I said “cash” and not “profit.” Most businesses fail because they run out of cash, not because their income statement says they lost money.
Banks assess debut using a ratio called debt-to-income. Simplistically, if your monthly expenses and debt payments are $5,000 and your gross income is $15,000, your debt/income equals .33. The numbers used in the formula come from your income statement and balance sheet.
However, I recommend a different formula developed by Kanketa Global Business Solutions, another organization I am affiliated with. Their approach measures:
- Money in the bank, plus money due from accounts receivable < 90 days, interest income, and leases payments from clients
- Money owed and going out to employees, vendors and lenders, including that “off the books" loan from Grandma Sally!
- Because it works with cash and incoming funds and everything you currently owe, it is a more conservative (safe!) measure of your business health.
So what's next for you and your business?
Your business is your future. Do you understand the value of your business? Are you actively planning for the future of your business? Of course you are! Everybody does, right? Give yourself a check if you can say, YES!
- I actually understand what this blog is about!
- I have a line of credit but don't even need it!
- I know more about my financial statements than my accountant.
- I have a plan for getting out of my business.
- I am on track to live in retirement, as I define it.
If you got three out of five, congratulations! You can take more time to stop and smell the roses. For most, the last three are really high bars and will only get higher as retirement gets closer.
Less than three? You are probably an owner who loves what they do but lets someone else handle the financials. Find an advisor who can teach you what to look for, and what to know. Your business, and life after it, is all yours. No one else will care more about your numbers than you.
Have questions about your numbers? Join the Idea Collective and get help from the me and my peers. Together we can educate and support you to better understand your numbers so you can continue to grow your business.