There are really 6 systems that are fundamental, absolutely essential, to the healthy operation of any and every business.
Those 6 systems are the one’s highlighted on the document that we call
5 Stages of Business Growth. (If you need a copy of that document click on the title link and it will take you to a Google Docs copy that you can download and print).
In past posts I have talked about the first two of those systems.
Right Message/Best System – the system that you will use to create the right advertising message for your business and define who needs to hear it (your Best Customer).
Customer Action Plan – the system that lays out the ACTIONS you will take, to get that message to your customers – future, present and past.
Today I would like to spend some time with the third system on our big six, hit parade – Revenue and Expense Management.
Money will come in to your business (revenue, sales, income) and money will go out (expenses). It is always the job of the owner to manage both sides of that equation and manage it to a happy ending.
There are any number of systems that you can use to do this. It could be as simple handwritten ledger or as complex as QuickBooks or something in between.
Whatever tool you choose, it should help you to keep track of four things.
- Revenue
- Expenses
- Balance Sheet
- Cash
You should set up Revenue as an “on-going picture”. Meaning that prior to the start of the year, you will –
- Begin with projections (if you are a new business) or start with last year’s numbers if you are an existing business.
- Then as the year progresses, you will change each month’s numbers to actuals.
Most businesses have Expenses that-
- They will incur only if they make a sale. (eg – raw food that a restaurant buys, the paint that the painter will put on your walls, the t-shirts we buy to print for you). This are commonly called “Cost of Goods” and are usually calculated/tracked as a percentage.
- Businesses also have expenses that they will incur whether they make a sale or not. (eg – the space they lease, their phone, marketing, advertising etc). We call these Fixed Costs. Not because the amount is fixed but because the cost will be there, sales or not.
There are things you can do that will have an impact on the business…. that do not show up as an “expense” to the business.
The Balance Sheet is where that information gets captured.(eg – putting money into the business or taking money out of the business for equipment purchases etc).
And last but not least – Cash.
There is an old saying that goes something like – “A business with poor profit and good cash, will survive…. but a business with good profit and poor cash will fail.”
Being aware of the cash that the business is generating and what is in the bank, at least on a monthly basis, is just good sense.
Cash in a business is can be seasonal. Cash might be positive by the end of the year but there could be months, when cash is low or even negative.
Spending large amounts of cash (equipment purchase, owner’s draw etc), in those months, could be devastating for this business.
I’ll be back in a few weeks to talk about a Cash Gap Plan.
