Although cutting bills is important, there are some areas in which you should avoid cutting costs as much as possible. Any item critical to your business success or differentiation should be kept. The following are some examples of items that should not be cut:
• Customer service: Since you are trying to grow your business, you should continue to focus on improving the customer experience, which means maintaining your customer service and not reducing these expenses. Therefore, if your business is known for providing customers free coffee while they wait, reducing this expense could possibly damage customer relationships. Even though this cost may seem unnecessary, the relationship it builds is not worth risking.
• Marketing and advertising: These expenses may be critical to expanding your client base and increasing sales. Any expense in this area should be eliminated only after a thorough review of the cost versus the number of customers and sales is completed. (For more information on tracking the effectiveness of your advertising, see Chapter 8.)
• Insurance: Unfortunately, insurance can never be purchased when you need it most, (e.g., after an accident). Therefore, insurance should not be cut just to reduce a bill.
• Legal and accounting: Although these bills can be some of your most expensive (when counted by the hour) the value of expert legal and accounting advice can often save you more than you pay. Further, the cost of not consulting a professional can often lead to more unnecessary expenses.
9. Review, Repeat, and Reduce
Once you think you have your complete list of your business expenses, you should continue to review these bills each month to ensure that no billing errors or issues arise. Although most of these items should require no more than a few seconds to review, failing to find errors can be costly. For example, a real estate business found an extra $100 per month was being spent on one rental home’s water bill. At first this additional cost was attributed to normal water usage during the hot Arizona summer, but eventually, it was traced to a toilet bowl flapper that had broken two months earlier. Although this repair cost the company only $5 to make, the failure of this trivial part added hundreds of dollars of expense to this company’s water bills before the issue was found. If they had continued to ignore monthly bill reviews, the item would have gone unnoticed and the high bill would have continued indefinitely.
4
Understand the Financial Health of Your Organization
Most business owners use accounting systems to monitor their organizations’ progress. When you are dealing with an ever-changing market, your financial reports will give you insight into how to respond to economic changes.
By carefully watching the financial health of your organization, you will not only understand your current financial position, but you will be able to notice and take advantage of trends. Perhaps sales increase dramatically on weekends, or products that used to sell well are no longer moving. Maybe repair service has suddenly started to increase. Whatever the change, good or bad, it is important to be aware that each change presents new opportunities. No business can be run on autopilot even if that business is a franchise or other turnkey operation. It will always be necessary to check your market and keep up with trends. Note that even the most popular television commercials change over time. With each new day you will find new challenges that your business must face and embrace. Therefore, take the time to regularly review all facets of your business.
There are three main reports your business needs to review monthly to understand the financial health of your organization:
• Balance sheet
• Profit and loss statement (also called the P&L statement or the income statement)
• Cash flow statement
Individually, each of these reports provides its own piece of information. However, none of the reports show a complete picture alone. For that you need to review all three reports, for the same dates. The profit and loss statement and the cash flow statement are generally run for a period of time, such as over a month or a quarter. However, the balance sheet is different as it is a “point in time” report. This means that the balance sheet shows a “snapshot” of one point in time.
To get an accurate view of your financials, you should use the last day of the period you chose for your profit and loss statement and the cash flow statement as the day you want to use to run your balance sheet. That will ensure that every charge in the profit and loss statement was taken into account in the balance sheet. For example, you may run one month as follows:
• Profit and loss statement: May 1 through May 31
• Cash flow statement: May 1 through May 31
• Balance sheet: as of May 31
As an entrepreneur, these three reports will help you keep your business on track. Any problems will show on these reports and the advance notice will allow you to make the course corrections necessary to stay competitive.
1. The Balance Sheet
The balance sheet has three parts: assets, liabilities, and owner’s equity. It is called a balance sheet because it is usually shown with assets in one section and liabilities and net worth in the other section. Both sections should balance. For example, if your business was to operate entirely in cash, and you withdrew any profits at the end of each period, the balance sheet would be very simple, showing $0 on both sides. However, most businesses don’t operate this way. Instead, they have ongoing assets and liabilities. Assets can include product inventory, ownership in buildings, business equipment, cash on hand, and accounts receivable (e.g., money owed to the business by customers). Liabilities may include things such as business loans, retained earnings (i.e., profits kept in the business and used to purchase more assets), owner equity, and accounts payable (i.e., money that the business owes others).
From this report, you can track how much money the business currently has on hand (i.e., your current cash position), what assets your business owns (i.e., tools and equipment), and what liabilities are outstanding. Although this report is valuable, alone, it doesn’t tell you if the business is making money or losing money. It also won’t tell you how much “cash” or money a business is spending each month. For that you will need the next two reports.
Sample 1: Balance Sheet
2. The Profit and Loss Statement
As mentioned earlier, the profit and loss statement is also known as an income statement or the P&L statement. This statement is usually run each month and shows a list of all the income (profits) and expenses (losses) for the business. This report will only list an item as an “expense” if the payment for the item went to pay a bill. If it paid down principle on a loan, the principle payment for the business will not be included in this report.
At the very bottom of the report is the total of all income and expenses. This number tells you if the business is making a profit or taking a loss. As a business owner, you can use this report to determine if your business is profitable or not. Review these numbers at least once a month to ensure that your business is performing as expected. As soon as you see any slippage, be prepared to start investigating the cause. If the profitability of your business is much less than you were expecting, chances are that your business has a problem that needs to be immediately addressed.
Most accounting programs also allow you to see this report by period (i.e., monthly or quarterly) over the course of a year or even a few years. Therefore, another benefit of this report is that it allows you to look at your business across a few months. From this information, you can see if the company is making more or less