| It's What You Keep - Part 2 of 2
In Part 1, I talked about the two “profits”
that entrepreneurs have to be concerned with: business and personal. On
the business side, they have to ensure that they are generating a profit
and have enough cash to sustain the business. Personally, they have to
receive enough benefit – financial and otherwise - from the business to
make it worth their money, time and risk.
The questions I
challenged readers to ask themselves include: Am I receiving enough
benefit from my financial investment? From my investment of time? From my
risk? Is our net worth growing every year? Is this business a net benefit
for my family?
There are no
hard-and-fast answers to these questions. Income levels, wealth, risk,
life balance … these are all relative and highly subjective. High income
to one person is low income to another. Life balance for one business
owner may mean eating dinner with the family one night a week, while to
another it may mean dinner together every night.
You and your family
should determine if your business is truly serving you. If so, great -
you’re living the American Dream. If not, then some really tough questions
need to be asked and answered. Is there light at the end of the tunnel?
Can we turn it around? When? If not, should we get out? Do we sell or just
shut it down and lick our wounds?
If your business is
going to deliver profits on both sides of the equation – solid business
performance and representing a net benefit for you and your family
– leadership and management can’t be left to chance. Your business, people
and sales skills will all need to be up to the task, or you’ll have to
delegate to others. This small business stuff isn’t easy.
Let’s focus on one
aspect of business performance that impacts the owner directly and
profoundly: cash. Last month I talked about not only running low on cash,
but potentially having to borrow money just to pay income taxes. That’s
scarier than any horror movie you may have rented for Halloween.
First, please
understand that profit does not equal cash. A company can be profitable
and still run out of cash. Certainly, being profitable is the main goal
but it’s only one part of delivering good business results.
If your company isn’t
profitable, dissect the income statement. Analyze the revenue, the cost of
goods sold, and the overhead expenses. What are your fixed overhead costs?
What level of gross profit (revenue less cost of goods sold) is needed to
pay for all the overhead? (This is your breakeven point and is a
key number for you to calculate and keep in mind.)
Yes, it’s laborious.
No, it isn’t as much fun as marketing or sales. But this type of technical
analysis of your numbers is an absolute requirement if you own your own
business.
Profitable or not, you
can’t run out of cash. If you do, it’s over. Turn off the lights and go
home.
While cash problems can
crop up for any number of reasons, two of the most common causes of cash
flow interruptus are accounts receivable and inventory.
If you sell on net
credit terms, you probably have experienced the joys of slow paying
customers. Tighten up your credit policies. Do credit checks on potential
customers. (Dun and Bradstreet have a good, inexpensive online service for
this.) Require payment up front. Accept credit cards. The immediate
payment for plastic more than offsets the aggravation of chasing after
late payers and the 2 or 3 percent fee charged by the card company.
Inventory is money.
It’s like piling up cash, so invest in it with great caution. You need
enough so you can fill orders, but excess stock represents cash that could
be used elsewhere in your business.
To summarize: Manage
your business not just for profitability for also to maximize cash flow.
Don’t let receivables or inventory eat up your cash.
Finally, stay in close
touch with your tax advisor. He or she can help you watch the horizon for
a looming tax predicament.
It bears repeating:
This small business stuff isn’t easy. If so, anyone could do it.
Just remember that it’s
not about what you make. It’s about what you get to keep.
Back to Part 1
Bill Collier is
the author of “How to Succeed as a Small Business Owner … and Still
Have a Life” and is the St. Louis area coach for The Great Game of
Business. He helps businesses teach their employees to think and act
like owners. He can be reached at 314-221-8558 or bill@collierbiz.com.
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