Study The Numbers
Let’s dwell on the end of this year and beginning of next.
When you study past or future expenses, review the relationship of various line items to sales. Industry averages are available, but none of our companies are exactly average and some reference materials cover broad categories. Read enough of them, and you get a sense of place. Use averages as guidelines. Understand when and why your company will deviate from the norm.
Remember, young companies may spend more heavily on advertising. Low sales at new businesses can skew the numbers. Your business may be capable of doubling or tripling sales with the same rent, utility bill or company van payment (ie, the van may sit idle 3 days a week in the beginning). Costs of goods and/or labor are more likely to flow up and down with sales. Some of this alignment will depend on terms you have with suppliers and terms, if any, you allow your clients. Many new companies need to prepay or pay COD. Established relationships may allow 30 days. If a business pays for goods on delivery, pays employees weekly, yet extends 30-day terms to its clients, the lag time can ruin a poorly capitalized company. Compare this to stretching a rotten rubber band – it doesn’t take much; and we have the “no money in the checkbook syndrome”.
How does your company compare to averages you might find at the library (ask reference librarian what is in printed form in the facility and what you can find online using your library card from their facility or from your office/home). Magazines or associations devoted to a certain industry may have this information in print or online. Some online sources are free; some require a membership, i.e. National Restaurant Association.
Study your company’s total expenses as a percent of sales, then see how much each expense represents of the total expenses. If operating with a paper and pencil system, divide each expense by the total of all expenses, then divide each expense item by sales. Using QuickBooks or another computer program, you can probably find a report, or modify a report and save the modifications for next month.
You might find utilities are 15% of sales. If advertising expense divided by sales is 12%, ask yourself if this should be more or less. If records are available, compare to last year and the prior year. Use this knowledge to tweak or prepare the company’s Cash Flow Forecast. Monthly studies can be erratic, so using accumulated figures should also be part of the routine.
Understanding where the money comes from and where it goes is important. If over 100% of income goes to expenses on a routine basis, eventually the company may be forced to close and leave unpaid bills behind hurting innocent people and other companies.
Charlene Finerty is owner of Plans and Profits, LLC a business plan writing service. She also presents workshops, teaches business plan writing and cleans up messy offices and backlogs. The column is not meant to give professional advice. Please confirm all ideas with your professional advisor. See www.PlansAndProfits.com and www.BusinessPlanWritingClass.com for more information or call 845.343.1515 between 9 a.m. – 7 p.m.EST