Successful businesses have worked out how to do these three basic things consistently and well: Book it, Bill it, Bank it. When a business is struggling financially, chances are they are falling down in at least one of these three basic areas. You need to get ALL THREE right – they are interrelated.

BLOG: 10 Things you need to know about your business

1. The importance of Cash Flow

Successful businesses have worked out how to do these three basic things consistently and well:

Book it – run a good set of books, so you can calculate how much to invoice your customers

Bill it – send the invoice out as close as possible to completing the job (same day if possible)

Bank it – don’t let your clients off the hook if they don’t pay. Follow up, follow up, and follow up!

When a business is struggling financially, chances are they are falling down in at least one of these three basic areas. You need to get ALL THREE right – they are interrelated.

2. What is my breakeven point?

The breakeven point is the point at which your business covers all of its expenses. It is normally stated as a monthly/weekly/daily sales target of $xxxx.

It is THE most vital statistic that every business owner should know – because if your business falls below this benchmark…you are actually losingmoney. However, on a positive note, it is also the figure that tells you how low you can go on price – and protects you when a customer is pushing you for a discount – or you are quoting prices to potential customers.

Ever wondered how some of your competitors can price their services at below your cost? It is a neat trick called variable costing – but you need to know your breakeven point first. Talk to your accountant about it.

3. What is included in cost of goods sold?

COGS (cost of goods sold) are those costs that are incurred to produce a sale.

The COGS will differ from one type of business to another.

A Tradie for example, will include the bricks, wood, tiles, pipe, cement, nails etc plus freight and direct labour in building whatever they build.

A Retailer will only include the cost of buying the goods, plus freight to get it to their warehouse or shop.

A manufacturer will include; raw materials, labour, freight plus factory costs like power, gas, insurance, depreciation on machinery and buildings etc.

Talk to an accountant about your personal circumstances because you really need to know this when comparing your results to industry averages. Don’t forget, the lower the COGS; the higher the gross profit. The higher the Gross Profit, the higher the NET profit!

4. What is my gross profit percentage?

This is where a lot of businesses trip themselves up. There is a relationship between your Cost of Goods Sold and your Gross Profit. Gross profit is the difference between the value of the sales and the Cost of Goods Sold (COGS). Most business owners get Markup and Gross Profit mixed up. For example:

Gross Profit Percentage = Gross Profit divided by Sales x 100% (note…it is on Sales)

Markup is what you add to your Cost of Goods Sold to work out your sale price (note, it is on COGS)

Here’s where the problem lies:

If you want Gross Profit (on Sales) of 20%...you must markup your cost by 25%

If you want Gross Profit (on Sales) of 25%...you must markup up your cost by 33.33%

If you want Gross Profit (on Sales) of 35%...you must mark up your cost by 53.8%

Run this by your accountant so that you don’t stuff it up! It makes a big difference.

5. What makes me the most profit?

This relates to the old 80/20 rule…which is: 20% of your products or services will be generating 80% of your profit. Strange, but true!

Every business has many parts to it. Compare the gross profit percentage for each product or service you provide to the goals for your business. Discontinue (or make more efficient) the products or services that fall below your goal.

6. Can I reduce expenses without reducing quality or service?

This is where the saying “a penny saved is a penny earned” comes from. Take a good look at each expense line on your profit and loss statement, and ask yourself if your business will run just as well if you reduce it; or cut it completely.

7. How much net profit is my business making?

Every business is different. However, if you are making less than 10% net profit annually; you should be worried. There are industry benchmarks that you can use to find out if you are on target for your industry. See below. You should be utilising efficient bookkeeping software such as Xero, with which you can import transactions, and generate P&L reports in real time.

8. How do I compare to everybody else?

There are benchmarks for every industry. You should ask your accountant to run a benchmark report for your business, because it will go into great detail – right down into how much everybody else spends on advertising, rent, wages…etc. It may give you some insights into where you are going well…and what also needs improvement.

Furthermore, it can also give you some goals to aim for…because businesses are normally segregated into small, medium and large. You can get a feel for where you sit in the scheme of things.

9. Will my business survive an economic downturn?

Debt is the Devil.

When the economy is booming, the value of everything goes up. Your house goes up in value, your business goes up in value, and your shares go up in value. So…as a proportion of this increased value, “debt” can sometimes look like no big deal.

However, in a downturn…the exact opposite happens. If you are paying interest only…the debt will remain at the same figure. However, if the value of your business, house, and your shares drop…all of a sudden…debt becomes a BIG deal.

Usually, this is accompanied by a drop in turnover as well. So you can get squeezed at both ends – the interest cost becomes a significant blow to your income and your net asset position drops – which normally results in your bank manager requiring you to pay off some debt. So…you need to pay off debt, but your income is less – guess what, you have to sell assets in a “down” market. After all that hard work in the previous years, this would be a tragedy.

You are allowed to have debt – in fact to realise the full growth potential of your business – you will need to borrow from time-to-time. What you need to do is CONTROL your debt…or else you will be CONTROLLED BY your debt. Accountants use various ratios to determine whether you are carrying too much debt or paying too much interest – they can give you a target band to remain within. Paying off some of the principal amount (and remaining within a safe operating band) is the key to your long-term survival.

You also need to understand WHY you have debt:

  • To buy or expand a business is great – but the business needs to make enough money to repay this debt…otherwise don’t do it!
  • Are you carrying a big overdraft or unable to pay off debt because you have cashflow problems (refer to the three “B’s” - Book it, Bill it and Bank it). You may have a potentially profitable business…but starving yourself of cash because of the way you are running it. In this case, debt isn’t the problem – you are.

10. Would I be better off with my money invested elsewhere?

There are actually two questions you have to ask yourself here:

  1. If I sold my business and put the capital I received into property, shares, or long-term deposits - would I earn the same (or more) for less effort and risk?
  2. If I sold my business and took up a “paid job” would I earn the same (or more) for less effort and risk?
  3. If the answer is yes to either one of these, it might be time to consider:
    1. Addressing what the problem is with your business…and determine if you can fix it. Or…
    2. Getting out before it ruins you financially and mentally.

Being in business is a high-stakes game. Sure, the rewards are high…but only if you get it right. Mistakes are costly, both financially and it can ruin your personal life too. Don’t jump into business without knowing these 10 basic things. They will make or break you.

To take your business to the next level, contact Rise Business Solutions today.