In the first part of the Break-even series, we discussed what the break-even point is, how to calculate it and the 3 important elements you need to employ to achieve that position. As a quick recap, new businesses might not generate expected income in the short term but can make enough revenue which puts them in a position of not making a loss but not making a profit either. At this point the business can still survive, however, the most preferable outcome is that of making a profit as soon as possible.
Now that you have set up your business and have started making sales, breaking-even could be your first goal as you work on increasing sales and lowering costs in order to realise profits in the mid to long term. It sure sounds simple, but from our experience, not so much. New business owners are susceptible to making certain mistakes that come with the territory of new ventures. You can learn more about the 10 Biggest Financial Mistakes that Businesses in the Trade Industry make here.
Cash-flow can be a determining factor when it comes to the profitability of a new business. In simpler terms, cash flow is the amount of money flowing in and out of your enterprise in a given time period. When the amount of money going out of your business is more than the amount coming in, that is called a negative cash flow and an intervention is required.
Positive cash flow is what you need to achieve, a situation where you have more money coming in to help with payment of expenses and even procurement of necessary inventory. Positive cash flow will help you keep your workers paid, and most importantly, stay out of debt.
When you invoice a client, the job is only half complete. There is need to encourage prompt payments (say 15 or 30-day payment terms) in order to stay in business, or request for an initial deposit (50%-75% of the full invoice) before delivering the product or service. Most small businesses might even struggle to maintain a healthy cash flow even after reaching the profitability mark due to inconsistent cash flows. In other words, your business will become insolvent if you don’t prioritise your cash flow.
Financial reporting sounds like something that is only done by large or listed companies, but that is not the case. It is important for small businesses to keep records and to start creating financial reports in order to understand business performance, trends and the trajectory that the business is taking.
The balance sheet, income statement and the cash flow statement are important and compulsory for a business owner to understand how the business is performing. Another added advantage of having these reports is that the business owner can use these documents when applying for funding.
Delegation gives you time to focus on business development and expansion. Your major role as the owner of the enterprise is to drive strategy on how to grow the books, increase sales performance, expand product range and attract new business. New business means more revenue which can lead to break-even and ultimately profits. It is wise not to spread yourself too thin and to delegate non-tactical tasks to other people while you focus on growing the business. For example, hiring a bookkeeper or accountant who is well versed in tax and law compliance issues will save headaches in the long run.
Are your prices in line with industry standards? Will you just Break-even or make a profit? One sure way of attaining business profitability is by making sure your job costing is done right. Some jobs may seem profitable but might not yield a positive net income. However, you can have an accountant cost a job for you to ensure your time, effort and resources are used to benefit the business.
One way of analysing industry pricing standards is by making use of ratios and benchmarks. Industry ratios and financial benchmarks can be used to analyse the market performance of companies in specific industries. Our clients make use of benchmarks to make critical decisions such as pricing and margins.
In conclusion, navigating to profitability requires business owners to have oversight of how the business is performing in order to find ways to improve and correct any inefficiencies. Understanding break-even is only the beginning. Working towards being profitable and scaling is not impossible, you need the right partner or consultant to guide you through the fundamental aspects and your business will be on its way to profitability.
At Tradies Accountant we work closely with business owners by doing quarterly reviews. In these reviews, we help you to set a strategy for the next quarter and assist you by providing forecasting advice, cash flow analysis, cost reductions, price improvements and the analysis of group company structure. Learn more here.