A common misconception among entrepreneurs is that once revenue is flowing into the business from the sales of goods and services, then things must be going well. While revenue and cash flow are important to a business, long term sustainability requires that businesses are also able to cover all of their costs and generate profits (i.e. profits should be greater than zero for for-profit businesses and at least equal to zero for non-profit businesses).
During the course of my engagements with entrepreneurs, there’s one case in particular that highlights the need to understand this concept. The client was a retailer, who purchased common household goods for resale. While the business generated high revenues and had a promising cash flow outlook, it was still unable to meet its growth targets. Upon closer inspection, I realized that the business was spending significant amounts of money on purchasing goods for resale. It turned out that rather than purchasing the goods at lower wholesale prices, which would enable them to add the right margins and make profit, they were purchasing the goods from other retailers at retail prices. This meant that if they purchased diapers for example from one of their competitors, and added their profit margin to the purchase price, they would always be charging higher prices than their competitors causing them to lose customers. How can you avoid this kind of situation? The answer is fairly simple financial tracking and planning. Documenting your receipts and expenditure will make it easy for you to identify how you make money, where you’re spending it, how it’s impacting your profit and what your goals for the future should be. The key though is finding a financial management tool that meets your needs without requiring a thorough knowledge of accounting.
I’m going to do a bit of self-promotion here, because Start smart has developed a tool that meets this particular need. Our cloud and SMS based bookkeeping tool, enables entrepreneurs with a limited background in accounting to track and manage their finances, set goals and introduce transparency to their businesses. The first 30 days are free so create an account today!
Visit us on the web: www.startsmartgh.com Send us an email: firstname.lastname@example.org