Do you know what revenue you need to generate this week to survive? By that I mean to cover all of your business costs and pay yourself? This is vital information you need to know to ensure you’re building a profitable business.
As a business owner, life can get so busy that unless you have your eye on the ball, costs can escalate. Before you know it you’re operating at a loss, totally unaware to the fact!
We all want a profitable business. While some business owners have a detrimental obsession with tax minimisation (hint – justifying spending because it’s a tax deduction is not prudent decision making!), the only way you can make sure you are building a profitable business it to monitor your results. Yawn. I know for some monitoring results is a tad boring, and just not something you want to have on your radar, but, by having it on your radar you will be able to make better decisions and, thus, more money. Does that make it sound more worthwhile?
Okay, for those of you who are not willing to regularly review your profit and loss and balance sheet (with or without your accountant/bookkeeper), I propose a simpler solution that is in no way perfect, but is better than the alternative – nothing.
Here’s what you do:
- Get your 2011 Profit and Loss and Balance sheet (You’ve got one of those haven’t you? If not get to it!).
- Take the total of all of your business expenses for the year and deduct any expenses you know were one off and not going to occur again.
- Add in any other expenses (annualised figure) you will incur this year that you didn’t last year.
- Add in loan and finance payments (annualised figure) that are not expensed, but occur on the balance sheet.
- Take a look at your personal drawings from the business (often found on the balance sheet as drawings or loan).
- Add these drawings to the other expenses above. Include extra drawings (if that will occur this year).
- Take the total of this figure and divide it by 12 to give you the monthly costs you need to cover.
- Take the total of this figure and divide it by 52 to come up with the weekly costs you need to cover.
- Take the weekly figure and divide it by five to come up with a daily amount (i.e. for each business day).
- Choose the figure – monthly, weekly or daily – to focus on. Ta da! You now have your break even point.
As I said above, this is not perfect, but for those not reviewing any numbers at all, it’s a start. You should ask your accountant/bookkeeper to revise the totals for you each time they review your accounts, so you can update them. Monthly would be perfect, but quarterly is better than nothing.
Now you know the figure you have to work towards, get to it!