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(Part 1 of 3) The death of your business!

Business Health check Part 1 of 3

Date 12/06/2018

In this blog series I will look at how you can make your businesses bottom line healthier, improve cash flow and make more profits.

When I ask people, ‘so, how is business’? The usual response I get is, ‘going well not sure if I am making much profit’.

The majority of businesses are focused on one thing SALES, and as important as this is it is not as important as your business making a profit on those sales.

In the series is broken up as follows.

  1. Review your business, to determine where you are. (part 1)
  2. How to allocate what you need to pay yourself from your business. (part 2)
  3. Setting up the processes so you know the profit your business makes on every sale rather than at the end of the financial year review. (part 3)

This three part series will help business owners to develop a healthy bottom line but you must be willing to put in some effort to achieve it.

Most entrepreneurs either don’t pay themselves anything or it’s below minimum wage. Depending on the business life cycle of your business this can be needed in the infancy stages, but as the business starts to gather traction, your wages may not change. You justify this by thinking I need to invest to grow my business; the less I pay myself the more I have to spend other business things.

Let’s look at getting an understanding what you are spending your money on.

Section 1

The review

This is the starting point.

You need to be aware of what you are spending, paying yourself and making in sales.

  1. Print off the last 6 months bank statement.
  2. Go through every cost and determine what are essential to the business and what are not. When I say essential I mean. There is a direct link to sales from this cost. If you business can survive without incurring this cost it is not essential.
  3. What are the non essential costs? Highlight these expenses in the 6 months.
  4. Determine if you eliminate these costs? Or move to a cheaper provided, go through each Non essential cost line by line.
  5. For the essential costs are they fixed or variable? Can you reduce these costs?
  6. Add up your personal wages/drawings for each month.
  7. Total the costs for essential and non essential each month over the 6 months.
  8. Add up the sales for each month.
  9. Take Sales less non essential cost less essential cost less your wages.
  10. Is this a positive or negative figure?

 

Example

Sales for the period                    €40,000

Less

Non essential costs                     €15,500

Essential Costs                             €23,500       (Inc 1 employee wage €9,152)

Your wages                                    €5,000

Profit / Loss                                   (€4,000)      (loss)                                    

So what picture does this paint?

The business owner is taking on average €192.30 per week; the business has made a loss in the 6 months. The one employee gets €352.00 per week, and there could be €15,500 of payments which could be eliminated or reduced. This business owner needs to increase their wages, reduce their non essential costs and review all essential costs.

Depending on the industry the business, an owner should be able to take 40% of sales in wages €16,000 as you are the main risk taker and number one employee of the business, make 5% or €2,000 in profit, hold 20% in taxes or €8,000 this means you have €14,000 to pay the essential and non essential cost for the period.

Your action step.

If you are registered for VAT or PAYE, you should have a separate Tax bank account. This ensures that the sales VAT funds are separate to your main trading account,  put the cash necessary every month away for your P30’s this will ensure you always have the funds available to pay liabilities as they fall due.

Conclusion

Good cash flow management is critical to ensure a profitable business.

For next week review your last year’s Tax return. If this is your first year operating you should use your business plan figures for year 1 or your most accurate forecast if available.  The bank review will give you an understanding of where your money is going. You need to stop non essential spending.

Next week we will look at what you can take out of your business in wages, you’re your business should pay for how much profit can you make on each sale.

The goal is to do more with less.

I hope you have been able to get some benefit from this post. If you have a questions be sure to get in touch.