Ok let’s talk about a topic near and dear to my heart. It’s called:
Where Did All My Money Go And Get Your Hand Out Of My Pocket!
What’s that supposed to mean? Well, it means that all entrepreneurs in my experience have similar problems that often result in failure of the business at worst or enslavement of the owner in the best case scenario.
There are very good reasons that 50% of small business’s close within the first 5 years and 66% in the first 10. Some of them could be personal such as the owner getting ill or having non business issues such as a divorce or other family issue. In some instances, they may be put out of business by new completion, changes in trends or acts of God such as a fire or a flood. In my experience, I haven’t found that the great majority of entrepreneurs close up shop because of an unwillingness to work. Most are smarter than the average bear and willing to work twice as hard as anybody else who works for them. These are the qualities that drove them to strike out on their own in the first place and they’ll be damned if they are going to fail on account of their own shortcomings.
So if it’s not brains and it’s not work ethic, what is it?
Ready for it?
It’s because it’s very expensive to expand a small business, I’d rather cut out another kidney than deal with the banking system AND everybody and their mother has their hand in your pocket. They should at least be required to wiggle their fingers so you know they’re in there but most of the time, they just slip in and out and steal your money without you even knowing it.
How is that possible? Here’s a quick list of line items that change on a regular basis if you aren’t paying attention:
· Property Taxes
· Supply Costs
· Phone Bills
· Trash Removal
· Health Care Costs
· Bad Debt / Revenue Never Collected For Services
· Employee Raises Without Corresponding Production
· Merchant Service Fees
· Parking and Transportation Costs
Yep…all of those go up on a regular basis at alarming levels. I’ve seen many of these increase at a 20%-40% per year amount. The people who run those businesses should be arrested for their practices. When your business has a price increase you will find it necessary to communicate with your clients. Some of them may even complain about a 2-4% increase just to keep up with inflation. The great majority of the line items above have no such conscience. Many of these companies lure new clients with low rates in the first 12-24 months and then jack the rates after the introductory period is over. They figure the client won’t notice, won’t have the time to deal with it or will just find it too painful to switch carriers or service providers. It’s a complete racket. Even a small business can see thousands of dollars in annual increases between these items above.
In order to further explain why all of this is crucially important, we’ll need to introduce a few terms and a little bit of math. I’ll keep it simple.
How does your business make money?
Well…. you sell goods or services and you collect “Revenue”
From your Revenue you then pay the “Cost of Goods Sold”. COGS is essentially the cost of directly providing the good or service. If you owned a cleaning business, you’d take the $1 you earned and subtract your direct labor, supplies and transportation . You essentially ask yourself, “Does this expense occur ONLY when services are sold”. If the answer is YES, you would then include the expense in the COGS.
When you Subtract COGS from Revenue you end up with Gross Profit.
So this is the money we make right? Yeah not quite.
We then subtract all the other expenses associated with the business not yet addressed. Things like rent, insurance, utilities, maintenance, interest and taxes are now deducted. This is where you begin to notice everybody’s hands in your pockets at increasing levels. Insurance goes up $400 a year, phones go up $100 a month and Trash goes up $50 a month. That’s $2200 a year!! Assuming you get to keep about 50 cents of everything you bring in, sales now how have to increase by $4,400 to keep up with JUST THOSE THREE wildcards.
Back to our story….
What’s left is your NET PROFIT. This is the number that is actually left in the bank for ownership to grow the business. By the way…this number doesn’t necessarily have to be positive. Yes it’s possible for the owner to actually work all month and have less at the end of the month than when they started.
And THIS is where the rubber meets the road and the owner starts losing sleep.
Why did I quit my job where I just got handed a paycheck?
Will my business EVER provide the freedom I dream of?
Is it my fault that things are failing or not living up to expectations?
How is it possible that we have twice as many clients as I thought we would need and the money still isn’t working out?
How Do I fix this?
What do I do?
I’ll tell you what you do. You go back to your business model, your plans and your historical data. What was last year or the year before like? What changed? Who slipped their hand into your pocket and stole your profit?
I’m going to save you the time and brainpower and just give you the answer. I can guarantee that it’s one or all of the following things:
1) Expenses such as those listed above have increased without you even knowing it. It is not uncommon for a $200 per month trash fill to become $280 a month overnight. THAT’S A 40% INCREASE. Oh yeah….and they don’t tell you. They just send the bill. What if gasoline went from $3 a gallon to $4.20 overnight? People would LOSE THEIR MINDS but it happens all the time with trash, phones, insurance, internet service, parking and transportation costs.
2) You have employees who are not producing at their expected level. You may have even given them a raise based on “prior” performance or “tenure”. How is it possible that somebody can go backwards in production and yet feel totally justified in collecting their usual check. Trust me…it’s easy…I see it every day. Here’s a golden nugget. Employees will do what THEY think is good for the business. It’s up to you as the business owner to stay on them like a hawk and remind them what is required on a regular basis. It’s the truly unique employee who is 100% aware of what is needed, knows where they are falling short AND are in the process of taking steps to achieve what they know to be their entire job.
Yep I know….it’s asinine. Adults who try to get away with things like children that only hurt the business on which they depend for their paycheck. Here’s a little secret….they can quit…you can’t. There is always another desperate small business owner they can promise things to who won’t figure out the truth for a couple of years...rinse and repeat.
I was recently approached by an employee asking for a way to make an additional 12,000 per year for management services of her department. At the time, we had 5 other department members who weren’t producing at full capacity and we had room for 10-12 additional staff. Of course I can do that for you I said, all we have to do is get the existing staff a little busier and hire another couple of staff. I’m not willing to split our current pizza but I’m more than happy to share a larger pie. What response did I receive you ask….I was told “that seems like a lot of work”. Yeah no kidding……
In what reality is anybody compensated additionally for producing less? It’s great work for those who can get it but it is always short lived. The only way to make progress is to produce and grow year over year. If you don’t, the expenses of life will eat you alive.
3) Business’s can never reach their full potential without employees. You realized that early on. During your first year, you answered the phone, performed all of the services and paid the bills on the weekend. Business got bigger so you hired somebody to answer the phone and 2 people to perform the services so that you can focus on growing the business. Fixed cost is a KILLER for small business. Often, it is necessary but it’s a sure fire way to have a horrible cash flow experience when you have a down month. Mr. Expense doesn’t care that Mr. Revenue didn’t show up that month. He just wants his.
I’m am 99% certain this is where all the money went and it’s a full time fight to keep things on the rails and surround yourself with a staff of people who understand and care about these issues as much as you do.
At the end of the day, ownership has to be primarily concerned and aware of a few select numbers.
1) Net Profit – How much money was left over after all expenses were paid? Banks like to know this one and they like it to increase year over year
2) Net Margin – How does the amount of net profit compare to total revenue. If you can increase Net Profit AND increase your Net Margin (aka how much of each dollar do you keep), you are running a business that is becoming more efficient year by year. This means that you have succeeded in keeping the work productivity up, the thieves out of your pockets and you just may realize your dream of freedom as long as you can keep it up.
If you have found value and solace in these blogs and would like to keep working on your business strategy to start or kick-start your stagnant situation, I've set aside some time in my schedule. Just click the link below and schedule some time. I'd love to hear about what you have going on.