Running a business can be fun and exciting. Especially if you are manufacturing creative items like soaps. Often we get caught up in the manufacturing and selling of the finished products that we don’t keep up with the bottom line.
As a small business owner you need to understand your business financial numbers. It can be frustrating but important to know and understand. To start off I would like to discuss the importance of understanding your sales numbers. So let’s break it down.
Sales: Oh yea! We love those. I know I do. This is the actual transaction where someone pays you cash or cash equivalent for the product you just made. It is such a warm and fuzzy feeling and you are super duper happy someone is willing to buy your product.
Variable Expenses: What in the world are these expenses? Though they are called variable they have nothing to do with expenses that can vary from month to month. They are expenses directly related to making a sale. They include the cost of the materials to manufacture the product, the labor to manufacture the product, if there are any travel related to selling the product (do you deliver your product to the client), merchant account or paypal fees associated with the sale and commission paid to a sales rep. These expenses are directly related to the product of the business.
Gross Profit: This is what is left over after you make the sale and subtract all expenses associated with the sale. It tells you if you made money from the sales for the month and if you are profitable within your industry range. It is a good guide if you are making sufficient money.
Fixed Expenses: These expenses are generally the same from month to month or are not associated with the product or service your business provides. Expenses such as rent, utilities, administrative labor, insurance, dues and subscriptions, payroll taxes and professional fees are considered fixed expenses. With your fixed expenses you have to pay them regardless if you make money in your business or not. They are expected to be paid. This is why you need to know what your fixed expenses are so that you can set sales goals for your business to cover the fixed expenses from your business.
Net Profit: This is the extra cash in the bank! We all strive for a net profit. With the net profit you can use the cash to grow your business. You may need the extra cash to buy more materials so that you can increase your sales or hire more staff if needed to run your expanding business.
If you find that your gross profits are not enough to pay your fixed expenses then you need to look at your numbers more closely. Start with your gross profit. Are you pricing your product competitively in your market so that after your variable expenses you are making a gross profit that is sufficient enough to pay your fixed expenses? Also, look at where you are buying your variable expenses from. Look around for better resources for your materials so that you can save money on the materials. There may be a vendor out there that is closer or have better pricing. You just have to search.
Next look at your fixed expenses and see if there are ways that you can possibly save money. For example, maybe by switching your utilities company with another you will have substantial savings per month that will lower your monthly obligations or shopping around with insurance agents for better rates. Some items you will not be able to change but there are bound to be some fixed expenses that you can trim a few dollars off.
I know it may be taunting to think about the numbers of your business but take the bull by the horn and begin to understand how they work. Take a class with your local SBA office or other local entrepreneurial classes that will teach you how to understand your business financials.
Knowing your business financials is empowering and this empowerment will equip you with the ability to grow your business wisely.