Using Business Finance to reach your Dream Profit

Let’s talk numbers (don’t fall asleep on us!)

Why do we advocate our clients to lead with numbers? Because numbers allow us to make better decisions and be intentional 100% of the time. Instead of blindly guessing a path, we can use numbers to guide us towards the best path forward!

So many business owners we speak with are afraid of numbers and hand off their data to CPAs or other parties, but I would argue it’s hard to run a business effectively if you do not grasp your numbers. Yes, it’s possible to have a killer product and be an overnight success, but without understanding your monthly costs or revenue, you might be handicapping your business.

Your results steer decisions. Helping you prioritize and manage next steps.

Business Finance in 5 Easy Steps

How exactly can you turn those pesky numbers into results? We’re breaking it down into 5 easy steps.

1. Compile all of your monthly costs: No matter if you’re a product or a service based business, start by collecting all of your monthly costs. Get into the details - from rent to salary down to electricity to fuel or inventory! You can’t expect to grow a successful business until you have a firm grasp on all of your costs (including expected future costs). Expanding too quickly is a top reason businesses fail and understanding your costs is a remedy to ensure you know your costs before expanding.

   1. What you need: organize every cost that hits your bank account (or Quickbook account) and start lumping expenses into categories. Don’t forget to pay yourself the salary you (and your employee) deserve!

2. Break-down the costs further: Think through each cost category - is that cost fixed each month, meaning they will occur regardless if you have 1 sale of 1,000 sales? Or is that cost variable, meaning your costs increase proportional to your sales. Most businesses will have a mixture of fixed and variable costs. Understanding which are connected to each sale vs. fixed each month will be a key enabler to allowing you to manage your business effectively (and help you better understand your anticipated cost when expanding your biz).

   1. What you need: group fixed costs that don’t change each month together (e.g. rent)

   2. What you need: group variable costs that change with each sale

      1. If you have ingredients or inventory, make sure you track the costs associated with each sale as cost of goods sold

3. Determine how many sales are needed to cover all your expenses in a month: To calculate this, you’ll need to know how much revenue you expect to generate from each sale.  If you only get $5 per sales it will require many more sales than if you earned $500 per sale.  Use historical data if you have it available. Note: you will need to cover all fixed expenses, but be careful here because typically there will be an associated variable cost increase for every additional sale so make sure you’re taking in the cost of goods sold into consideration as well.

   1. What you need: average order size.  Look to historical data or estimate to the best of your ability if you have no past sales

   2. What you need: variable cost associated with each order in terms of cost of goods sold or ingredient cost

4. Expand beyond breakeven: Build a business to grow.

   Pro tip: “budget” for profit. We like to recommend you set a revenue goal that covers your expenses PLUS a 15-30% profit! That profit can be put back into your business, given to the community, or used as distribution / pay raises!

5. Establish Key Performance Indicators (KPIs) and Track Monthly: As soon as you have the targets you need, it’s important to track results and see if you’re reaching your goals each month so you can adjust strategy as needed to reach the lifestyle you want.

We hope you enjoyed these 5 Basic Business Finance tips! Too many people get distracted with the day-to-day and lose sight of their numbers and targets.

This is Brent’s specialty area.  He loves excel and assisting entrepreneurs create financial goals / projections that help their business grow.  If you need any help in this area, contact Brent today, to see if he can help you with any of the steps listed above.

Should you hire a business consultant or coach? Read more here.