Profit is not an Income Problem
Dave Ramsey has a famous saying, “debt is not an income problem” – read: it’s a spending problem! At Two Sense Consulting, LLC, we agree with this concept and think it’s worth considering as a business owner that profit is not an income problem either.
If your business is not making a profit, it’s not an income problem – it’s a spending problem. Sure, at the very beginning of every business creation, there are startup costs. Yes, you have to spend money to make money, but you also have to be very strategic about how and when you spend money and how you save it. Find our top tips for ensuring that your company is prepared to reduce spending to increase profits.
Costs of Good Sold.
The cost of goods sold (COGS), sometimes called the cost of sales or cost of services, “is how much it costs to produce your products or services” (Investopedia). COGS include direct material and direct labor expenses that go into the production of each good or service that you sell.
Tracking COGS will allow you to price your products or services to sell correctly but also to analyze the material you use. The cost of supplies typically increase 2-4% each year in the US, known as inflation. Being able to track your COGS as a percent of revenue will assist in monitoring your margins, and you can modify purchases and price of products and services accordingly.
Check the contracts that you have signed in the past for services. Some may be three months, six months, or several years. If the agreement in review offers a product or service that is critical to your business operations, consider renegotiating for lower prices.
You may be able to get a lower rate in exchange for a more extended period. Watch for price increase terms and ensure that your price is fixed for the set period. Stay away from contracts that auto-renew without future price review.
Likewise, if you’re still subscribing to platforms, apps or services you no longer need or use, be sure to cancel them as soon as possible.
One of the biggest wastes of money for both a business and an individual is interest expense. Loans are a part of everyday life, and something most people will have to apply for at some point in life and business.
But, these choices should be made with extreme caution. One of the best ways to avoid using credit cards and loans for business expenses is to create a capital expenditure savings account. Set up an automatic withdrawal each month and put it into a savings account that you ONLY use for capital purchases. We recommend that between 2-5% of gross revenue be moved each month into this savings account and set it up automatically.
Think of this money as totally untouchable until you need to buy something over $1,500. The money in this account is for the big items that you may otherwise have to put on a credit card. If your business makes $10,000 a month and you put aside 3% each month, you will save $300 a month, $3,600 after a year and $18,000 after five years.
If you commit to not using this money until you need to (think major equipment replacement), you will save yourself the stress and money of hefty interest rates.
Never pay late fees.
The other major waste of money is late fees and service charges. We code late fees, service charges, and interest expense for all the clients we work with separately so that they have visibility on money handed over to the bank. There will be times, hopefully, rare occasions, where you can’t avoid it, but we recommend knowing how much you spend on these charges each year. Not only will it help remind you to keep it to a minimum, but it will also remind you how important it is to put a little aside for the future.
Monthly Finance Meeting.
Your books can’t be something you look at only at tax time. They should be a regular part of your business discussions and decisions. The best way to keep on track with this (without being bored or overwhelmed with accounting discussions) is to set up a monthly 15-minute finance meeting with your Chief Financial Officer and Bookkeeper.
These professionals will be able to show you areas of interest, items to discuss in more detail and savings. A good CFO should be able to prepare the financial reports in a manner that supports not only your business operations but your desire for detail and understanding and teach you what to look at.
Two Sense Consulting, LLC, offers hourly CFO services and bookkeeping to keep your financial records up to date, but your overhead costs low. If your business is not as profitable as it should be, start with these five simple steps and call us to set up a free consultation to learn more at [email protected].
Disclaimer: The information in this article is intended to be general and not tax or legal advice. Every business situation is different, and tax regulations change. Please get help from your tax preparer. Disclaimer: The information in this article is intended to be general and not tax or legal advice. Every business situation is different, and tax regulations change. Please get help from your tax preparer to make sure your calculations are correct.