How long will it take for a small business to be profitable? How long before there is black ink instead of red ink on the bottom line? How long will it be before you have money in the bank? Our answer may surprise you. There is a bookkeeping method that always allocates money for profit, from the very first transaction. You can grow your small business bottom line first instead of last with the Profit First system.
When we start a small business, we typically need to use our own savings or a loan. Then, the usual strategy is to work hard, work smart, make sales, pour more money into expansion, and hopefully start seeing a positive number on the bottom line. Unfortunately, many small businesses with great business plans and lots of hard work do not make it. According to the Department of Labor Statistics, about 65% of small businesses make it to the 2-year mark and 44% survive 4 years.
All too often a small business is good at generating cash flow but not good at allocating cash flow. And that is where the bottom line suffers almost from day one.
Traditionally your bookkeeper enters income, subtracts expenses, and ends up with your profit. In the heady first days of a growing small business, money is coming in and you are already dreaming of growing. That can mean things like a bigger office, more computers, more employees, and lots of travel expenses. The rationale is that the business will keep expanding. So, all of those things you are spending money on are going to fuel that expansion followed by more money coming in. Unfortunately, there are times when there is less money coming in or expenses have gotten too big, and your bottom line suffers.
We at Exigo Business Solutions suggest that you use the Profit First system and grow your small business bottom line first. The Profit First system simply changes the way you keep your books. Start with income and subtract (or take) profit and you are left over with expenses. Profit is no longer something that may or may not occur at the end of the month. It is always there and the first thing you deduct from cash on hand.
This approach does two things that help a small business not only survive but prosper. First, by allocating profits to go into the bank every month the business builds up a cash reserve. This rainy-day fund will help the business through a slow period without having to borrow from a bank or your credit cards. And, perhaps more importantly, by making expenses the item that needs to be balanced, it forces the business owner to take a hard look at each and every expense from day one.
Expansion of a growing business is great if it is profitable. But, not all businesses in all locations are scalable. You can only sell insurance to so many people in a small town and there will a limit to how many patients a doctor or optometrist can see every day. If you have a small business and are wondering when the profits will increase or how you are ever going to handle your bookkeeping, contact us at Exigo Business Solutions to talk about how you handle your bookkeeping and how you allocate profits. We offer a free no obligation call to see if your current bookkeeping is working for you.