If your business constantly requires more and more investments to stay afloat, you should know that this is abnormal. Each business is different but the problems they face are often the same and don’t always lay in the low-quality of products. Let’s talk about the two most common mistakes that make your business unprofitable and ways you can avoid it.
1. You believe that all the money from your business is yours
Businessmen often think that all the money their business brings is theirs to keep. If you are working on a prepayment, it can easily be the clients’ money. So you shouldn’t spend it until you provide the services. Why? Well, let’s say you own a business that designs websites. A client can place an order, make a prepayment but after a few days decide to cancel the order and requests their payment to be returned. But if you already spent that money, this creates a problem.
Or maybe you will need this money in the future. For example, you took money from the company funds on the 10th for personal purchases but on the 20th you need to pay your staff. Unless you have enough money left to do so, you may not have enough funds to pay your staff. Some of them will be left without a paycheck because you used the funds yourself.
2. You cannot quantify management decisions
There are no good and bad management decisions. They can be profitable and unprofitable. But entrepreneurs sometimes don’t incorporate this logic into their decision making.
Are you planning to increase your conversion? Make a sales funnel and see what increase in revenue and profit it will ultimately yield. Do you want to automate business processes? Estimate how much available time your staff will have and then think about whether this time can be spent with greater benefit.
Let’s assume that you have a shop with a single cashier that averages one customer every 30 seconds. You automate the process and now the cashier spends 15 seconds on the buyer. But is there wisdom in this? If there are queues in the store, then this decision is beneficial. You will reduce the lines in your store and the sales will increase. It’s necessary to calculate when the increase in sales will pay for automation.
How to avoid these mistakes?
1. Only take the money that you have earned
The business owner is entitled to dividends on profits. Determine what percentage of the profit you will receive. If you are both an owner and manager then you are also entitled to a manager salary. In order to correctly calculate yours and the staff’s salaries, you can use a business consulting NYC service. Your personal life and your business are intricately intertwined so that it makes sense to hire one accountant to manage both sets of finances.
2. Remember that an increase in revenue is not always an increase in profit
With increasing sales, the price drops and costs per unit of goods increase. It sometimes happens that one business sells 10,000 units of goods a month and works at a loss, while another business sells 1,000 units and makes a big profit. Increase your sales volume only as long as it generates profit.
3. Make a financial model if you’re planning to change something in your business
You can use a spreadsheet that shows how changing one thing affects others including the most important aspect, the net income. The main indicator that a business is operating efficiently is not the number of sales but the end profit. Each sale or provided service must bring a profit.