A curious thing happens to self-employed professionals and creatives in the spring of every year. They wake up one day and realize they’d better figure out how much money they made last year so they can file and pay their taxes. But wait, shouldn’t a business owner already know how much money they made last year, last quarter, or last month?
If you don’t keep track of how much money you’re making, you have no idea whether your business is successful or not. You can’t tell how well your marketing is working. And I don’t just mean you should know the amount of your total sales or gross revenue. You need to know what your net profit is. If you don’t, there’s no way you can know how to increase it.
If you want your business to be successful, you need to make a financial plan and check it against the facts on a monthly basis, then take immediate action to correct any problems. Here are the steps you should take:
1. Create a financial plan for your business. Estimate how much revenue you expect to bring in each month, and project what your expenses will be. If you need it, get help from a business planning book or software, or work with an accountant.
2. Review the plan monthly. Even if business owners take the time to prepare a financial plan with profit and loss projections, they often let it sit in a drawer. It’s not enough to have a plan — you have to review it regularly.
3. Remember that lost profits can’t be recovered. When business folks compare their projections to reality and find earnings too low or expenses too high, they often conclude, “I’ll make it up later.” The problem is that you really can’t make it up later: every month profits are too low is a month that is gone forever.
4. Make adjustments right away. If revenues are lower than expected, increase efforts in sales and marketing or look for ways to increase your prices. If costs are too high, find ways to cut back. There are other businesses like yours around. What is their secret for operating profitably?
5. Think before you spend. When considering any new business expense, including marketing and sales activities, compare the cost to any expected increase in earnings before you proceed to make a purchase. Make sure you aren’t spending more than you’re likely to earn. You can often increase your profitability simply by delaying expenses to a later month, quarter, or year.
6. Don’t be afraid to hire help. Retailers and restaurateurs wouldn’t consider operating without employees, but many service businesses limit themselves by being understaffed. Almost any business can benefit from hiring some part-time or contract help. You might use a bookkeeper, virtual assistant, or office assistant for a few hours monthly or weekly. Your own time is better spent earning revenue.
7. Pay yourself a regular salary. If you aren’t already doing this, designate a specified amount of your business income as owner’s compensation on a monthly basis. Each month that your business meets its profitability goal, pay yourself the full amount. When you miss your target, dock your pay, and when you exceed your goal, pay yourself a bonus. Issuing yourself a monthly paycheck will give you a strong incentive to stay on top of the numbers and keep your business profitable.
Always evaluate the success of your business based on profit, not revenue. It doesn’t matter how many thousands of dollars you are bringing in each month if your expenses are almost as high, or higher. Many high-revenue businesses have gone under for this very reason — don’t be one of them.
