Business owners have a tendency to focus on sales – the top line. A busy shop or plenty of orders rolling in from the website and they are happy campers. Accountants focus on the bottom line – in other words whether the operation is profitable and viable, measured in particular by cash, which they will all tell you (it’s lesson #1 in accountancy school) is the lifeblood of a business.
In a nutshell – if it is profitable there should be a nice cash surplus building up and if it is not profitable the money will soon dry up, if it hasn’t started to do so already. It may be profitable but the cash is leaking out elsewhere under your very nose without realising it.
It’s important to remember that just because you buy for £1 and sell for £3 you are not on the road to becoming a tycoon. Far from it, you need to look at what happens between the £2 profit that is putting a smile on your face and the stark reality that your bank overdraft is at its limit and there’s no money for you to pay the staff or even yourself.
The money is going on overheads, in other words the costs of opening up in the morning without making any sales, or even costs associated with sales such as delivery to your customers or paying the people who make your business happen – the staff. In short it is an indicator that your operation may not be viable because however much you sell the gross profit (selling price less the cost of buying or manufacturing the goods ) is simply not enough to cover your other business costs.
If you have truly shaved all other costs to the bone the solution may lie in increased productivity or standing back and examining how to tweak your processes to really squeeze out savings you would not have ordinarily thought of, usually through enhanced productivity or efficiency. Very often a business can find a way to reduce a particular cost by a few pennies an item but if they process many thousands of items a year it soon mounts up to a very lot.
In one of my businesses we reduced the weight of each customer’s package by 2 grams by taking out a sheet of paper and replacing it by copying onto both sides of another sheet. Savings per package were 30 pence as it dropped a band on the postal charge scale and we were sending many thousands of these items a year. Small action, big saving.
When your back is to the wall is usually when you become most creative, although it may take the input of an outsider to ask you simple questions that you have overlooked simply due to your familiarity and closeness to the situation.
For some businesses even though are they are trading profitably there is still a lack of money at the end of each month. This indicates that there may be too much debt being serviced, perhaps on a loan taken out to finance the business in the early days or simply because you are paying yourself too much!
Keeping your stock levels too high is another reason why the business is lacking funds. You’ve spent it all on buying more and more stock without realising that you are buying rubbish or keeping too wide a range or depth of items in order to please every customer. Your profits are sitting on a warehouse shelf. It’s solvable but often simply gets worse and worse due to flawed or non-existent stock control.
If you find yourself having to regularly pump in savings, borrow privately or worse still borrow from the bank against your home it is more often than not fatal for your business and catastrophic for your financial future. It takes a lot of guts to quit but better sooner than later once the writing is on the wall.
Yes, there are people who risked everything to keep going and made millions. Have you ever met one of them? Do you have the nerves of steel and a compelling business reason to plough on regardless?
The dashboard warning light is on – ignore at your peril. Talk to your accountant and take action!