1) Research costs
You need to research the costs so that you are not caught off guard by unexpected expenses. Not only the unexpected cost sets you off track, they make it hard for you to accomplish your goals. If your budget was set for a certain cost and you later determined that more money would be needed, you now have reduced the profit being made on your sales. This puts your business in a bad position because you know have to determine how you will increase both revenue and profit to offset your high expenses.
When operating a business, your budget will need to be created to account for fixed and variable costs. Fixed costs include your rent, utilities, phone/ Internet, accountant, legal fees, technology, salaries, advertising & marketing. Variable costs include the costs of goods sold and labor costs/ commissions.
Here are a few tips you should know when it comes to researching your business costs:
- Overstate costs in order to avoid underestimating expenditure
- Marketing costs are very easy to underestimate
- If a new business, include startup costs
- Variable costs are usually associated with sales
By doing the proper research, you are better able to plan for the costs of operating your business. This process helps you make informed decisions that allow your business to operate without any unexpected financial surprises.
2) Project revenues
Calculating how much money will be generated from your sales activities on a monthly, quarterly, and yearly timeframe is a must if you want your business to be successful. So many failed businesses occur due to not calculating revenue or they overestimate their revenue and increase their cost that was estimated.
This is why it is important to follow these given tips when projecting revenue:
- Forecast revenue – you want to have a goal for your business that your entire team understands needs to be worked towards.
- Use conservative revenue estimates – do not project generating a million in your first year of business, especially without having an established customer base.
- Use previous year’s figures as a starting point – if you made $200k in revenue the previous year, an estimate of $350k would be a safe projection to make if you expect growth to occur.
The important thing about projecting your revenue is that you base your projections on real data. You cannot create projections based on the revenue you would like to bring in without having the system in place to support your goals. You need to base your projections upon the capabilities of your business. If you were a million dollar business last year, it will be very hard for you to be a hundred million dollar business in just one year. Therefore, base your projections upon realistic growth that will occur over time.
3) Figure out gross margin profits
Your gross margin profit indicates the financial health of your business. Gross margin profit is the money left over after your cost of doing business has been paid for. For instance, your business could generate $1,000,000 in revenue but not be in debt at the end of the year because your expenses exceed the revenue you generated. This happens because you do not know how much you are spending to operate your business. You could be wasting money on products and services that have no affect on your business beyond costing you money. Therefore, you need to analyze your business operations in an entirety to discover where expenses can be eliminated.
Here is some advice that will help you improve your gross margin profits:
- List all costs of goods sold
- Subtract costs from overall sales revenue
- Consider entire business vs individual departments
When you follow these steps, you give yourself real insight of how well your business is doing. Now you have the information that is needed to increase your profits while reducing your costs at the same time. This allows you to develop a business that is actually successful, rather than just appearing successful due to large sales volume.
4) Create a 12-month cash flow projection
You will need to know how much money is supposed to be coming into your business during the year and how it is going to be generated. This helps you create a budget that is based off of expected projections that are supposed to occur over a 12-month period. When you do this, you can establish how much money should be spent on a month-to-month basis, which allows you to keep your spending under control. This especially helps when you operate a seasonal business. If you know you operate a business that makes the majority of its money in the first 4-5 months of the year, you know that you need to drastically reduce your spending once this cycle has ended.
You create a 12-month cash flow projection by doing the following:
- Allow for payment terms – this helps you better project when your payment transactions will be occurring.
- Allow for payment method – credit agreements incur expense
- Understand your opening balance and how this affects cash flow
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5) Adjust for unreliable payers
Unfortunately, you will have to deal with customers who make payments beyond the stated terms of the invoice. This affects your cash flow projections because missed payments lead to no cash flow into your business. This throws everything off because you have your own expenses to pay, and missed payments make you late on your own payments due to your service providers.
Knowing that you will have to deal with unreliable players, you need to create a plan that effectively deals with these types of customers. Although there will be times when a customer cannot make a payment due to their own personal financial issues it should not become a habit. Once it becomes habitual, though, that is a customer you need to fire because they are taking advantage of your leniency. If you do not initiate a plan that keeps these troubled customers under control, you will find yourself out of business due to their bad payment behaviors.
Unreliable players should be dealt with in the following ways:
- Allows for late payments in the revenue column – this should only be allowed to occur no more 3 times, even if they are a big client because their products and services are expensive to
- Allow for bad debt – you need to have an amount set aside for how much debt will be allowed to occur based upon payments not being made at all
- Create business policies to deal with late payment – it should be communicated that late fees and other penalties will occur for late payments to encourage customers to make payments on time