Show Me The Money

July 19, 2010 · by Shirley Tan

Plan S sets in motion a cohesive strategy for overall success by considering each and every aspect of your business. Now that you have your dream team in place, we’re going to talk bottom line. Because it’s not the staffing, marketing or purchasing decisions alone that make or break a company -- it’s finances. For some, money is the most exciting part of running your own business, but managing it right can also be the most daunting task.

Whether you are just starting your business or have been running it for a while, finances are going to be the underlying factor to nearly all of your decisions. When starting out, it’s important that you have enough capital to

• a) invest in capital equipment and inventory and
• b) hire necessary help

The number one reason businesses fail is that they are under-capitalized. We need enough money in case growth shoots straight up – anticipating demand is just as critical as having funds for a rainy day.

My father’s story

My father was a brilliant businessman, but he was always under capitalized. Every business he ever went into, he would either be leveraged to the hilt or indebted up to his eyeballs. Yet from the outside looking in, you wouldn’t know it. One thing I learned from working in our family business is that you can only transfer funds so much in a day. Eventually the bad cash flow management catches up.

Underestimating demand, when growth is there, can lead to very unhappy customers and mediocre services/products. Even if you start with awesome awesome quality, having limited capital forces you to cut corners in order to save money and compromise on quality.

The lesson I’ve learned is to always leave enough money in the bank to re-invest in growing the business. This may sound obvious but if you have partners in the business that want to withdraw more than what’s budgeted or if you feel that you’re not getting paid enough, taking the money out will deplete your re-investment opportunity. Sometimes; however, taking the money out is warranted for example, tax reasons. Discuss this with your accountant and tax adviser to manage your cash flow and manage your tax planning.

Understanding cash flow

The basic financial documents you must learn to read and review often are: balance sheet, profit and loss and cash flow (with budgeted numbers)

Understanding your business doesn’t just mean that you know which products to offer or how to market your business. Understanding finances mean knowing where the numbers come from. Don’t just rely on your bookkeeper, aunt, cousin or whomever. Make sure you understand all the entries and can verify that they are accurate. At the end of the day, you’re the one signing your company tax return.

By understanding business numbers, you will know the true cost of running and operating your business. You need to know at what point you break even and at what point you are profitable and you need to build in for allowances that would sway the numbers either way (profit/loss or break even).

It’s also important to recognize that a business cannot expect to grow without hiring staff. Having a close understanding of your finances makes it easier to know at what point you need to hire another person. Consider how much this person will need to contribute or generate in sales to be worth his/her salary, benefits, office space, etc.

Underestimating operating costs

There are many expenses that fall under the category of operating cost. You must consider cost of operations, rent, utilities, insurance, workman’s comp, labor, benefits, taxes, etc. Each business is different and unexpected expenses can creep up if you’re not prepared

Consider the economic climate. Labor costs are low now and you can get things cheaply, so the question I want you to consider is how long can this be sustained? Can you buy yourself enough time to build a business model on low overhead and still turn a profit and sustain the business when expenses grow? We experienced the opposite during the boom in the mid 1980’s when rent was high and we were competing with Silicon Valley companies for good employees. In order for a business to continue to be profitable, your business operation must maintain normal cost.

Be sure to do projections (forward looking) each month by plugging in the real numbers to see how close you are to the estimated cost and where you really stand, this way you will not get caught off guard.

An all-too common scenario in the ecommerce world is someone who goes to work for himself because he doesn’t want to or cannot work for someone else. He does the marketing and pays himself a small salary, his wife works for free, doing all the accounting work because “she’s helping out.” Is this business really profitable?

If you include in your business plan (Plan S) that your business must be able to operate without you and that you can be replaced, it provides a clearer picture of true business cost. Otherwise, your business owns you and not the other way around and your goal of not working for someone else, well, that is negated because you’ve created a job for yourself (it just happens to be in your business). In the situation above, the wife’s time was also involved but not considered in the true cost of running the business. Take yourself out of the equation (or account for your own salary) and then see if the business is still profitable.

Key overlooked revenue-generating ideas

• Increase margins (negotiate for lower wholesale pricing, find new suppliers and/or increase markup)
• Sell lower to gain market share but ensuring that you have a backend product to market afterwards.
• Charge for add-on's such as rush ordering, overnight/expedited shipping/delivery
• Value-added services such as embroidery/personalization/engraving fees on top of what is free (for example, if initials are free, then add $2.00 for full names, which take more time, hence an increase in perceived value)
• Gift wrapping charge
• Providing insurance coverage and monetize your website traffic.

Offering the above services will not only bring in more cash, they provide additional service options for better customer service.

Okay, so its good that you’re watching your cash flow and let’s say you’re flush with money in the bank. Don’t start feeling rich and go on a spending spree. Discipline is the key. Keep a tight rein on your spending. Nothing disappears faster than money besides water down the drain. It’s easy to get caught up in the “feeling” of success rather than true success, so be careful and stick to your budget. I’m just saying … from experience.

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Category: By Merchants, For Merchants | Tags: Finance