In this article from E-Myth Worldwide, the first recommendation is to start with expenses – not revenues. We couldn't agree more.
Budgeting for Fluctuating Revenue | E-Myth Worldwide.
At a recent Q&A session with small business owners, Andy and I challenged these small business owners to tightly manage their businesses "above the line" and "below the line." It is a lean way of thinking that we have advocated for more than ten years, but never has this concept been more poignant for small business owners than it is today.
What this means is that in your small business, you can manage profitability in two primary locations on your Profit and Loss Statement…
As a small business owner, the first way you can create greater profits is by controlling your expenses: lower expenses for the same revenue equals higher profits. For us lately this means using Hotels.com for EVERY hotel stay in order to get every a free night for every stay. It also means the absolute best rates and free upgrades for last minute stays because they have a price-match guarantee. This saves at least 10% on hotel stays, but in our practice, we pay for the lower cost nights and exercise our free nights in pricier markets like an upcoming trip to Chicago, for instance.
It also means doing smart things like changing office light bulbs to energy efficient bulbs, turning the heat and air up or down a few notches, negotiating better rates for Internet and telephone service, selling expense yet rarely used equipment and much more. Look at every expense in your business and seriously consider if it is a requirement – and if so, what is possible at all to reduce its cost to your bottom line? Saving $20 a month x 12 month is $240 that would be a nice bonus for a valuable employee – or pay a lightbill one month when things are tight. It is cash in your pocket that you don't have to spend. Every nickel counts.
Above the line, you must manage margins on your products and services – you must minimize the cost of goods sold – the direct costs of the product, the people who produce or deliver the product, etc. without sacrificing quality, service or customer experience. For us, this means making the decision to outsource specific tasks instead of hiring a new employee. Employee costs are rising, but outsourcing has never been more affordable. It is less expensive to my customer – and increases our efficiency and customer service to have some tasks outsourced. It also means negotiating with vendors who provide you with the good and services you re-sell…things like shipping, payment terms and other seemingly "minor" details can cost 10% or more on the bottom line. Take the time to negotiate these issues and maintain healthy relationships with all vendors to assure that you retain the privileges far into the future regardless of what other obstacles your business may face.
Most importantly, you can do none of this if you don't have a written account of your income, cost of goods sold and overhead expenses. You must do this – and with this, you can prepare a budget and cash flow projection for the months to come. Here at HALO Business Advisors, when we have assisted a client with the preparation of one of a cash flow projection and the client accepted it based on the goals THEY set for their business, we have NEVER had a client not achieve this cash flow projection. It is truly one of the most concrete and fulfilling elements of our coaching relationships – because we know how well it works – and we never grow weary of watching our clients' succeed.
Small Business Tip: The bottom line? Make the greatest margin you can make on the goods and services you sell while spending the least amount on the overhead expenses of your business. A constant and watchful eye on these two points of your finances will assure profits at the end of the year.
