Articles Tagged ‘Trusted advisor’

Move the Needle-Know your numbers

Tuesday, April 10th, 2012

Raise your hand if you are interested in starting a small business because you love accounting.

I’ll assume that unless you are starting up a small CPA practice, most of you kept your hands down. Let’s be honest, accounting is no fun. For nearly all small businesses, it generates absolutely zero revenue, doesn’t help find a new prospect and isn’t going to improve your marketing.

However, you can’t run a small business without a crystal clear understanding of your numbers. In fact, I often tell entrepreneurs that if you aren’t committed to getting your arms around the financial fundamentals, you should shut your business down. That’s right – close the doors.
Here’s why.

Unless you know your numbers you can’t effectively monitor your progress and you won’t have any idea how to grow profitably. For those of you who are thinking, “I didn’t get into business to make money, I just want to do what love/help people/be in control/etc.” that is OK – but please understand that you don’t have a business, you have a hobby and there’s a huge difference.
The good news is that getting your arms around the financial essentials isn’t rocket science. Like most of the concepts we discuss it can be boiled down into a handful of simple fundamentals.
First, you have to carefully calculate your gross margin on sales. Gross margin is the profit that is left over after you have subtracted all of the variable costs (cost of goods sold) associated with each sale.

For example, if you are a general contractor and remodeling a kitchen your variable costs would be all materials, subcontractor and labor costs associated with this particular job. Subtract all of these from the price your charged the customer and you have your gross margin.
Next, develop a budget. Most business owners ignore this simple piece of advice because they don’t know how or believe that it’s a waste of time because they are just guessing with the numbers. These are terrible excuses.

All you need to do to build a budget in whatever accounting software you are using is to go to the Help section and type in “create a budget”. Minutes later you will have your fist budget in place. And, it’s OK if your numbers are completely wrong in the first year of having a budget – guessing in year one is encouraged!

The most important number you need to understand in this first year is your break even which is calculated by taking your fixed costs and dividing them by your gross margin percentage. This number represents the bare minimum you need to sell each month to stay in the black.

Finally, you need to find a good accountant. Your accountant should be much more that the individual who prepares your tax return. They should help you with these financial fundamentals throughout the year and serve as a trusted advisor through many of your toughest business challenges.

C.J. McClanahan
Reachmore Strategies
317-576-8492
cjm@goreachmore.com

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