Profits enable a business to accomplish a mission to include noble causes. If your business is not pursuing a profit, it is a hobby, stagnate, or a money pit. Common causes of unprofitability include:

1. Shoebox accounting: Inadequate financial records

2. Failed pricing strategies: Under pricing or over-looking customers willing to pay more for value

3. Peak performance budgets: Revenues fluctuate in most businesses so budgets based upon peak performance miss the mark

4. Feeding the baby: Most small business owners treat their business as their ‘baby’. We feed the baby and continually invest money into bigger advertising and better office equipment to make the business grow. Often, this is done at the expense of paying the owners or taking a profit. Ultimately, the owner cannot sustain the draining lifestyle and goes out of business.

Profits are key to the success and growth of a healthy business. Added Impact can help you avoid or escape these traps.

All businesses ultimately fail for the same reason– lack of cash! Surprisingly, most businesses that file bankruptcy report a net profit, but the companies simply did not have sufficient cash available to pay employees and other vendors. Consequently, the business is forced to close. The most common source for cash is payments from customers. Therefore, small business owners often assume that if the business has sales that it also has cash. Unfortunately, this is erroneous.

Give your business the best chance of success by understanding the common cash flow killers and heed advice for avoiding these pitfalls.

1. Mismanaged Accounts Payable (vendor bills) and Receivables (client invoices)

Cash flow is the amount and timing of money flowing in and out of your business. Unreliable clients pay invoices late or possibly never and impact the amount of money flowing into the business. Late and unpaid invoices plague 75% of small businesses. To reduce late payments, prepare professional invoices with concise payment instructions and clear terms for late payments, which may include collecting interest on overdue invoices. You may even opt to offer a discount to clients who pay within a specified timeframe.

Managing outbound cash flow is equally important. Small business owners commonly pay bills immediately upon receipt. Ensuring the bill is paid is good, but paying bills without a strategy may result in unexpected consequences. The rate at which a vendor invoices may not align with due dates and the criticality of the purchase. Paying bills on a schedule, such as the 10th and 25th of each month, allows you to review the stack of bills in your inbox as a collective whole. If you are short on funds to pay all of the bills, determine if a payment can be paid during the next bill pay cycle. Also, many suppliers will offer flexible financing if you arrange the terms prior to the bill’s due date. Take advantage of options that allow you to avoid late payment charges.

2. Peak Performance Budgets

As sales increase business owners are quick to respond with increased employees, inventory, storage space, and so forth to accommodate the impending growth. The reality is that even if the overall trend is upward, there will likely be ups and downs from day to day and month to month. If your business operates up to its means based upon yesterday’s increased sales, tomorrow when rainy days arrive it will likely be operating beyond its means. To avoid the pitfall, remember that short term financial data is not good for long-term business decisions. Furthermore, you must have a rainy day fund. Creating a cash cushion will help you weather the storm or give you time to adapt if the trend is long-term. You can also rely upon your business savings to pay for unplanned expenses or planned seasonal trends. The exact amount of cash you should have in reserves varies by industry and expected trends, but as a general rule, your rainy day fund should have between three (3) and six (6) months’ worth of earnings.

3. Mismatched Financing

Frequently, small business owners rely upon credit cards to buy equipment, make office improvements, or fix other items. Most credit cards require the balance be paid in full in less than 30 days to avoid incurring steep interest rates being applied. Using short-term lines of credit (such as a credit card) to pay for long-term assets quickly drains the business of cash. Furthermore, it condenses the timeframe the asset has to pay for itself. Matching the credit terms of financing to the life of an asset increases cash flow. An owner should evaluate refinancing previously mis-financed purchases to transition purchases of long-term assets to a loan with more amenable terms.

4. Inventory Management

A small business owner that sells products may increase inventory to accommodate anticipated growth or to avoid missing out on possible sales. The purchase of inventory requires spending cash, and until, a sale is made no cash is earned. The cash is tied up in inventory. It’s important to ask yourself, “How quickly does the dollar that you spent on inventory come back to you in the form of a sale?” The ideal solution is to transition to a real-time inventory management solution, but that approach may not be feasible for your business or industry. Research and realign financials with industry standards. Maintain inventory levels that support sales but do not unnecessarily tie up cash.

5. Growing the Baby (Your Business)

If you are like many small business owners, your business is your baby. You invested countless hours into your business, and you want it to grow up to be big and healthy. Consequently, small business owners are prone to ‘feeding the baby’. You invest into the business and invest and invest and invest. You purchase new equipment, a better marketing solution, updated technology, more employees, and so forth. Investing in a business can be good, but you must ask yourself was the investment planned and what are you sacrificing to achieve this endless pursuit.

Growth is good when planned, budgeted, and balanced in proportion to other business requirements such as paying existing bills and taxes, as well as taking a pay check. Examine growth or decline of sales over time and adjust your expenses accordingly.

6. Forgetting Cash is King

Cash is the lifeblood of all business. As the saying goes, “Turnover is vanity; profit is sanity; but never forget that cash is king.”

#1 Tip for turning Over-burdened into Over-joyed for the Small Business Owner

Entrepreneurs by nature are driven, optimistic, and highly skilled individuals. They are accustom to doing most everything themselves in order to get the venture off the ground. Starting a business is an energizing and rewarding experience. However, once up and running, the day to day requirements of operating a business transform that passionate entrepreneur into an over-burdened, stressed out, small business owner. All too often, small business owners find themselves buried by the back-end of their business and worried about cash flow. The do-it-yourself attitude that enabled them to boot-strap the start-up is now pulling them in too many directions leaving them feeling scattered, unproductive, and inefficient.

Glance in the mirror and if you see a trapped, time-starved, small business owner staring back at you, now is the time to take the action. Relinquish tasks that drag you down and distract from your passion. The tasks might be duties that you find boring or are outside of your core competency. Unfortunately, hiring several highly-skilled employees to ease the burden is usually not a viable option so an excellent decision is to tap into the expertise of a business consultant.

Hiring a business consultant is a cost-effective solution for leveraging specialized knowledge in areas such as finance, operations, and strategic planning. The right business consultant will help you clarify your goals, identify solutions, and implement process improvements in order to transform your business into an efficient, profitable engine. As you cross that bridge from entrepreneur to small business owner, turn over-burdened into over-joyed by leveraging a business consultant.

Vince Lombardi is arguably the greatest NFL football coach of all times. Every season Lombardi assembled both rookies and veterans to deliver his speech, “Gentlemen, this is a football,” which was followed by describing the importance of the football. The point was to keep players focused on the most fundamental element of the game in order to drive success.

Success in business also relies upon keeping the fundamentals in focus. Business is about profitability. Without profitability the business fails to exists long term. Most small business owners fall into 1 of 3 categories when thinking about profitability:

1. Raise revenues. (Increase sales.)
2. Reduce expenses.
3. Along for the ride.

Business owners driven by increasing revenues often follow the mantra, “One must spend money to make money.” Money is spent on marketing, incentives, and additional product or service features in order to increase sales. If not careful, this can result in greater unprofitability with each sale due to the ratio of expenses to each new sale. In contrast, fiscally conservative business owners try to solve financial problems by solely cutting expenses. Deep cuts into staffing, product materials, and other key elements without changing the business model causes the business to lose customers and profits. Business owners that are just along for the ride avoid the numbers and operate on instinct. Their gut feeling is that the business is humming along smoothly or sales seem low this quarter. This sometimes leads to riches and other times to catastrophic losses.

In simplest form, profitability is total revenue minus expenses. When focusing on the fundamentals, this basic definition serves as a great starting point. There is no substitute for concrete numbers when measuring the financial health of your business. A plethora of factors impact revenue and expenses such as product pricing, customer retention, supplier contracts, labor, and much more. Therefore, the company must compile sufficient and accurate data then conduct a comprehensive, balanced review. Maximizing profitability is about making educated, well-researched decisions regarding both revenues and expenses.

Business owners often perceive the decision whether to hire a professional bookkeeper as a matter of convenience, not necessity. If you are faced with this conundrum, ask yourself these five questions: 1) Do I have the time to do my own bookkeeping? 2) Do I have the discipline to keep detailed records? 3) Do I have the knowledge base to record income and expenses in a manner that ensures I meet all federal, state, and local government tax and reporting requirements? 4) Can I afford to risk the penalties associated with not keeping accurate financial records? And 5) Am I able to extract information from my books that helps me make decisions that improve my profits?

If you answered no to any of the above questions, you will benefit from a professional bookkeeper. Proper bookkeeping minimizes the risks of discrepancies in your financial records that result in an IRS audit and provides necessary documentation if an audit does occur. If you seek a loan, banks require financial reports from your books that validate the health of your business. Furthermore, quality bookkeeping empowers you to make informed decisions that drive growth and profits!

Seek out a bookkeeper that offers bookkeeping services combined with financial analysis and profit strategy services. Understanding and interpreting the information in your financial records exponentially enhances the value you receive from your bookkeeper. Accountants are not always clear communicators, but your bookkeeper should be. You need to be able to ask questions, seek clarification, and discuss options with your bookkeeper. Likewise, your bookkeeper should openly communicate with you.