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To improve business finances, we took every job we could. We took on jobs we shouldn’t have. Because of that, we operate at a loss. By this time this year, we expected to be able to put away $350k of savings. So far we’re at 40 percent of that. That makes cash on hand, or lack of it, a big obstacle for us.
Thoughts of the Day: Improve business finances by taking on bigger jobs can be tempting. Eating into savings in order to keep things going is dangerous. No business can afford to operate at a loss. Knowing what to do to shore up cash on hand is crucial.
Track your spending to improve business finances
To improve business finances, know that not all jobs are equal. And most businesses’ accounting systems aren’t set up to show an accurate, real-time picture of what’s going on. The charges that relate to doing the work, cost of goods sold, deducted from the invoices to the client, gross revenue, should result in money left over after doing the work, gross profit.
Improve business finances. For example, what happens if a job goes sideways with problems. Or a customer doesn’t pay? Perhaps the original estimate of what the customer would be charged isn’t enough? What if the result could be zero or even negative gross profit?
Gross profit from every job is what’s used to pay for overhead. Money left over is net profit. Net profit is used to pay off-balance-sheet expenses. Such as principal payments and building up cash reserves. That is to say, to pay off balance sheet expenses and build up reserves, pay one-third net profit to taxes. No avoiding it. To get ahead you have to have profits and pay taxes.
Some will argue that it’s worth taking low-margin jobs to keep people working. After all, profits just go to taxes. That attitude can run the business into the ground. Every business needs cash on hand or reserves. Improve business finances. Well-run businesses make enough to eventually get debt-free.
Successful businesses understand their finances
Firstly, if current reserves get used to fund a loss, the business loses big. It uses up money that could have been used to promote the business. Or market to a better quality of clients. Or reward employees for jobs well done or kept on the sidelines to keep the business safe.
Secondly, business owners are inherent risk-takers. They look for opportunities and find it hard to turn down work. They hope to be able to figure things out as they go along. But there aren’t a lot of options. If there isn’t enough money coming in, you can shortcut the job. Or use lower quality labor or materials. Pay your people less or not pay your vendors what you owe them. None of these are reputation builders.
Moreover, to improve business finances, most owners want to do good work and be of service to their clients. To do that, they need to find quality clients. Customers who understand and respect the quality of work you can deliver. That includes walking away from bottom-feeder clients who are none of that.
Grow your financial knowledge
Having a model to use to estimate the profit on every bid is essential. Figuring out how much gross margin is typical. Knowing how much overhead to charge to each job takes a bit of work but is well worthwhile. Test the model with a number of completed jobs to find out if it works. Knowing that a job is a loser gives you the option to renegotiate or walk away from work you’ll come to regret.
Clue your employees in as to what you’re looking to do: make more and spend less. Review every expense and ask if it’s necessary. Pay employees bonuses out of profits rather than handing out pay increases at review time. Be tight-fisted in order to build up the one thing every healthy company needs: profits.
Make it your mission to build up cash on hand and to protect that cash once it’s there. Put extra cash into money-market accounts. Tell your bookkeeper that the money is unavailable. Even the business owner needs to show restraint when taking distributions. At the end of the year, pay taxes and keep the profits inside to improve business finances.
Looking for a good book? Try “Indispensable By Monday: Learn the Profit-Producing Behaviors that will Help Your Company and Yourself” by Larry Miller.
