You can’t manage what you don’t know
If you don’t know what’s going on in your business you probably won’t be in business very long. Likewise, if you don’t keep track of your personal business you will have the same result.
I can’t imagine a business without books, but I know that many start-up’s do not keep good accounting records and wind up in trouble because of it. Business and life is about numbers, and - Cash is King!
Even more basic is the need to do a break-even analysis before you start your business so that you understand the fundamental importance of managing cash. A break-even analysis is determining first of all how much money has to be invested just to get ready to do business in any kind of a business.
Just think about opening a bagel shop or pizzeria. The first thing that has to be taken into consideration is the expense of getting ready to make bagels or pizzas: the rental of a space, purchase and installation of equipment, tables/chairs, utilities, phone/fax/internet, insurance, printing of menus, storefront identification, initial employees salaries and benefits, etc. – the start-up fixed costs.
Then, once you open the door for business, you incur variable costs for all the ingredients for making bagels or pizzas, packaging (bags/boxes), some advertising and promotions, other employees, taxes on sales, and various other costs depending on where you open your business.
All of these fixed and variable costs have to be in place, for the most part, before you sell one bagel or slice of pizza. They should be developed into a monthly budget so that you can measure what the actual costs are compared to what you budgeted.
Now comes the hard part: calculating what you have to sell – that’s how many bagels or pizzas every day and every week to cover your fixed and variable costs just to break-even. How many customers buying bagels or pizza does that equal? Are there enough customers in the area of your shop to achieve these estimates?
What about competitors – are other bagel shops or pizzerias close by? What’s better about your bagels or pizzas? Why would customers choose yours over theirs? What kind of advertising and promotions do you have to develop to attract customers? Discounts, sales, coupons, etc.?
Once you calculate how may bagels or pizzas you have to sell, at what prices, to cover your fixed and variable costs every day and every week, you now have a projected break-even. These sales estimates need to be added to your budget. Looking at all of these numbers before you start should shock you into reality, and clearly illustrate why you need to keep good accounting records.
What gets measured - gets managed
As you start selling your bagels or pizzas and begin to incur the costs of operating your business, you need to record these actual sales and expenses and compare them to what you estimated you would sell and your budgeted expenses – every day, week and month. This comparison will quickly reveal whether or not you are going to break-even, make or lose money. More importantly, it will allow you to better manage your business because as I stated at the outset – what gets measured, gets managed. The next step obviously is to determine if and when you will achieve a return on your investment (ROI). But now, at least, you have information to make that determination.