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If can happen to a large company (see story here) it most certainly can happen to your company. Surprisingly, many businesses that have never been through a tough moment fail to appreciate how often this happens. I am referring to a company not really knowing its costs and finding themselves in a position where they have to work out of a tough position because they didn’t realize what they didn’t know. Understanding the costs for your business is one of the most important things to know outside of understanding how to generate revenue. It seems simple but in practise can be a challenge many businesses struggle with.
Remember there are two basic types of cost your business has: fixed and variable. Fixed costs refer to the costs that are required to keep your business running. Rent, coffee, office supplies, and non-sales staff are all categorized as fixed costs. Variable costs refer to the costs that are related to generating revenue such as the cost of materials and sales commissions. As an entrepreneur or someone running a business you need to have a general understanding of what these costs are for your business.
Why is this important?
In my experience many entrepreneurs or business owners find out about financial problems after a critical moment has already passed like: potentially missing payroll, or an accounts payable balance that has silently grown or payments to the government that have not been made. By the time someone says something it can often be too late to correct for the problem and drastic measure have to be taken. If the quick math for your business is something you have memorized it makes it easy to find out about problems before they begin because every conversation you have with your staff and team will be checked against what you are looking for. As an example if you know you need a certain amount of sales at a certain average dollar amount you will be listening when your sales team talks about activity to hear if they are achieving the numbers you know they need to achieve. If not, you can get involved and figure out what changes need to be made before a problem arises. When you know the basic math for your business you will be able to listen to what is happening and catch problems before they arise.
One of the easiest ways to figure out the basic math for your business is to sit down with your finance team or people and complete the following exercise. Take out a blank sheet of paper and try to write out an example of a sample transaction. Take the sales, deduct the variable and fixed costs and then see what you think the profit was on your fictitious example. Then ask your finance team or people to do the same thing. Once you have both done this open up your profit and loss statement from your accounting system and see what it says. Who was right? Who was wrong? Who even knew? Chances are you will be looking at three different answers: yours, your team’s and your accounting system answer. This is the first place to start. Get everyone on the same page using the same language and numbers for a sample transaction. This exercise alone will reveal some things in your business that may need to be fixed, addressed or improved upon.
At some point every business needs access to money. If not now then in the future. If you want someone to ask you some questions that get you thinking about capital for your business, visit www.mlenow.ca to explore what your business might be able to do.
I created mlenow.ca to help businesses looking for ideas, money and results. Our team gets up every day to help businesses that find themselves in this position. Let’s chat and connect if you (or someone you know) needs some help with their business.