Is Your Business Profitable?

profitable

Sounds like a stupid question, right? But you’d be amazed at the number of people that are operating on borrowed time, never quite sure what their cash flow situation looks like. It’s simple to get tricked into a false sense of security, only to learn differently when you start preparing your taxes!

There are two issues at play. Overhead and cash-flow. Overhead can bankrupt a business if not kept in check. Cash-flow can mask an ongoing problem. Here’s an example:

My buddy has an e-commerce site – 30% of the items are kept in stock, and the rest are drop-shipped to his customers. He did $115K in gross sales for 2008, which sounds pretty good for a 1-man operation. But his profit margin was only about 20%. So that should leave him with $23K. Unfortunately, many of the items he kept in stock sold at a loss (dump it or get stuck with it forever), and he had quite a bit of overhead as well (merchant fees, phone/fax/internet, health insurance, office equipment, software, web hosting, and advertising). When all was said and done, he was left with $7000!

When I heard this, my jaw just dropped.. This guy puts in 60+ hours a week, and he makes less than a part-timer at McDonalds! What went wrong?

For starters, the economy. As a result, his profit margins fell quite a bit. He wasn’t getting as many orders. He tried lowering his overhead (cheaper merchant processor, better phone plan, etc), but it barely made a dent.

His cash-flow hid the problem for quite some time, as there was always money coming in to replace the money he was shelling out. But when sales slowed down, the problem came to light rather quickly.

I feel his pain, as I’ve been in a similar situation. In my case, it was during the .com boom, and operating like that was the norm. (And we all saw what happened as a result of that!)

So how do you protect yourself? Start by keeping better records. I use a detailed spreadsheet that lists my overhead costs and expenditures, as well as my money coming in. It’s broken down by month, and I take 60 seconds to update this spreadsheet when things come in. I always know how my business is doing, and it makes tax time a snap!


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