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It's What You Keep - Part 2 of 2

In Part 1, I talked about the two ďprofitsĒ 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 Ė 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 Ö 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 - youíre 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 Ė solid business performance and representing a net benefit for you and your family Ė leadership and management canít be left to chance. Your business, people and sales skills will all need to be up to the task, or youíll have to delegate to others. This small business stuff isnít easy.

Letís 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. Thatís 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 itís only one part of delivering good business results.

If your company isnít 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, itís laborious. No, it isnít 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 canít run out of cash. If you do, itís 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. Itís 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. Donít 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 isnít easy. If so, anyone could do it.

Just remember that itís not about what you make. Itís about what you get to keep.

Back to Part 1

 

Bill Collier is the author of ďHow to Succeed as a Small Business Owner Ö and Still Have a LifeĒ 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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