Building a financially sustainable masterpiece
As a bookkeeper, it has been my privilege to work with hundreds of business owners as they follow their passion to build businesses in all kinds of industries. It is exhilarating when they thrive, and can be heartbreaking when they fail. In any endeavor, but especially when building your own masterpiece, it is essential to consider the costs and make sure you have the resources to reach your goals. Since dealing with financial data is my specialty, I’d like to share three practical tips for ensuring your masterpiece business is financially sustainable and will be able to serve the purpose you dreamt for it.
First, understand the true cost of selling your product or service.
Do you have a handle on what the cost per unit is in your business? If you sell a product, you have a cost associated with making or buying that product, but you have other directly related expenses, too: the time it takes to process or prepare the product, packaging costs, merchant fees, etc. If you are providing a service, you may have some payroll costs, processing fees, perhaps some supplies or travel expenses, and certainly the cost of your own time. What is the true cost per unit for your business?
When you know the true cost per unit, you can start asking the critical questions for business planning and development. Am I charging enough? Are there ways I could reduce my direct costs? Is my gross profit (revenue – direct costs as calculated above) enough to cover all my other operating expenses? Is it enough for me to pay myself? How many units do I need to sell to pay myself what I want to earn, or reach the goals I have for my business?
Knowing and understanding these numbers will help you build a solid financial foundation for your masterpiece business.
Review your balance sheet regularly.
It’s a common mistake for business owners to neglect their balance sheet. They are so focused on making profits they don’t consider it very important and just focus on their income statement. However, the balance sheet is where the major bookkeeping errors show up. If you know you have less than $10k in inventory, but your balance sheet shows $100k, then something is wrong. If your balance sheet shows bank or credit card balances that are negative, then something is wrong. If any of the asset or liability accounts don’t make sense or show an amount that seems unreasonable, then something is wrong. Maybe data is missing, maybe data has been entered in duplicate, but these are all signs that the numbers on your income statement can’t be trusted, and you need to get professional help with your bookkeeping.
Another key when looking at financial reports is to review accrual-based reports, even if you are reporting cash basis financials on your tax return. Accrual reports will tell you so much more about the long-term health of your business. Cash reports can only tell you how much money you have right now; they don’t give you any clue whether you will still have money next week, next month, or next year.
This is why monitoring what’s happening on a regular basis by looking at the right reports is so essential.
Pay yourself – the right way.
Most business owners know they are supposed to keep business and personal separate, but they still treat the business accounts as an extension of their personal and draw money whenever they need it. It is healthier for your business if you treat it as truly separate, and put yourself on a regular payment schedule. If your business is a corporation, then you are likely paying yourself via paycheck and additional distributions. Otherwise, you are probably just taking draws.
Either way, treat the business as a truly separate entity, with separate goals and budgets. Think of it as your masterpiece, and treat it accordingly! In a way, it has a life of its own, and you need to respect that. It is so easy as a business owner to make the business’ money subject to your personal financial needs, but simply taking a larger draw when you have a higher than normal personal bill to pay, for example, can jeopardize your business’ financial goals. Treat your masterpiece with the respect it deserves, and give it room to achieve its true potential.
This article was written by Julie DeLong and published by Choice Magazine.
Julie is an experienced bookkeeper and accountant. Since the founding of Backyard Bookkeeper in 2008, she has worked with over 250 different companies in a wide variety of industries, including construction, nonprofit, health care, consulting, retail sales, online sales, legal, entertainment, real estate, and many more.
Julie also does most of the actual number crunching for the business and would rather play on Quickbooks than Facebook. She has a weakness for superhero movies, Rachmaninov, and chocolate, and loves reading in her spare time.