Starting a small business is a dream come true. It makes no difference whether you are an insurance salesperson about to go into business for yourself or a health care professional setting up a private clinic. Building a business from the ground up is exciting, inspiring, and a lot of work. But, no matter how well you plan and how hard you work, the ultimate success or failure of a small business often depends on how you manage the finances. Because we want you to succeed, we offer this advice about how taking profit first will help you avoid business failure and bankruptcy.
Maybe you have left a job you had for five, ten, or twenty years. Money from your savings went to pay initial funding business expenses. The paycheck from your former employer is long gone. And, you are wondering how long it will take to make a profit in your new business. The quick answer is that you can have a profit as soon as money starts coming in. You simply need to allocate profit as one of the things you take first. How can you do this?
The standard way to keep the books of a small business is to count the money that comes in and subtract the expenses. This leaves your profit (or loss) on the bottom line. The Profit First system that we use at Exigo Business Solutions works a little differently. We count the money coming in and subtract your profit. The number left over is the sum of your expenses. Using this method of bookkeeping, you take a profit right away, are able to put money in the bank, and can build a cash reserve for emergencies. But, taking Profit First also helps you avoid financial disaster. How is that?
A common reason that many small businesses fail is that they do not manage their finances properly. There may be plenty of money coming in, but expenses tend to keep going up until they consume every available dollar.
As you work to grow your small business, you will invest in new equipment, more employees, training, travel, and more. The goal, of course, is to find more business, better-paying business, and new products and services to steadily increase cash flow. And, viola you are successful! Cash flow goes up. So, you invest in more things that will keep making your cash flow go up. Interest rates are low, so you borrow more money from the bank because your cash flow is never quite enough to cover your ever-growing expenses.
Then, interest rates go up, a new competitor forces you to reduce prices, or you find that you have simply expanded beyond the capacity of the market you serve. If you find yourself in this unfortunate situation, you will need to sit down with your bookkeeper or accountant and take a hard look at your expenses. The beauty of the Profit First system is that when you allocate profit as the first priority, you start out by always taking a hard look at your expenses from day one! So that you don’t end up in a terrible situation like we just described.
Most bookkeepers are not familiar with the Profit First system. They would rather use the traditional method. It is easier for them, even if hides problems from you and eventually could lead to the failure of your small business. If you want to use Profit First, outsource your bookkeeping to someone like us at Exigo Business Solutions. We have the expertise to manage all aspects of this system to help you stay ahead of any problems.
The first part is to allocate profits and bank them. But, choosing the best bank for your profit first account is important. And, you will want to have someone who knows how to manage the deposits from total income using prfit first.
At Exigo Business Solutions we will show you how top line revenue differs from real revenue. If your business earns a profit margin on materials used, the real revenue for your business is what you earn and not the total cost of the materials involved. And real revenue is also different from gross profit and is the most accurate representation of the financial health of your business and the best guide to managing expenses.
The Profit First gives you a better picture of how our business is doing. And, consistently profit up front forces you to confront unnecessary expenses before they consume all of the assets of your business.
Learn more about Profit First. As you come to understand what this method can do for you and your small business, you will wonder why you did not hear about it sooner. Having said that, late is still better than never. Start using Profit First, allocate money for profits every month, and take that long overdue hard look at your finances with the help of the experts at Exigo Business Solutions. Schedule a free consultation to see how using the Profit First model can actually help your business grow.