Accounting – It’s not about how much you make, it’s about how much you keep.
“No.1: Never lose money. Rule No.2: Never forget rule No.1.” – Warren Buffett
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When you start a business you must do your due diligence to account for every dime that must be spent to make a transaction happen. If are not diligent about this, you will find yourself working 17 hour days without making a profit. Hypothetically it is very possible to bring in large amount of gross revenue (gross revenue is the initial amount of money you bring in before expenses), while netting very little. And if you do a ton of work, but profit very little, you are going to be in a world of hurt when it comes to pay day. When you do your costing for business, you must observe my 7 rules and you will be fine.
Rule #1: Pay yourself first
Make sure you pay yourself first. On every transaction, make sure you slice off an amount to pay yourself. If you own a car dealership, every time a car is sold make sure you get paid something. You must pay yourself first.
Rule #2: Produce a 20% profit
After each service or product is delivered make sure that you have at least a 20% profit margin remaining. If your business is not making at least a 20% profit margin, banks and investors will be very hesitant to lend you money.
Rule #3: Use a variable pay method when possible
According to the Small Business Administration well over 85% of all the jobs created in the United States are created by small business owner. And having spent time as a consultant / speaker and trainer with thousands of small business owners, it is apparent that most small business owners do not have huge amounts of startup capital. Thus, protecting your initial startup capital is super important. Paying your team on a variable based pay out system will make this possible. Pay your initial team on a commission only basis if possible. Don’t pay any money out, unless money comes in. This system is the best. Offer huge commissions and big incentives, but simply refuse to pay any money out unless money comes in. Essentially you are telling your team, “you will get paid for what you do, not for what you intend on doing.”
Rule #4: Don’t forget to account for the small stuff
You must account for the small stuff. An American politician and Senator, Everett Dirksen once said, “A billion here, a billion there, and pretty soon you’re talking real money.” WOW, those guys are out of touch. However, what I am talking about is:
A. Don’t forget to account for credit card processing fees (when 3% of your revenue disappears on every transaction it adds up quickly)
B. Don’t forget to account for payroll tax. Because all of the payroll tax software programs, “automatically deduct everything from your account” to simplify things, most American business people have no idea, how much money they are paying for this.
C. Don’t forget to account for insurance. My least favorite expense is insurance. Whenever you are buying insurance you are buying a piece of paper and a promise,however having good insurance has been shown to help entrepreneurs sleep better. I’ve been in business since I was 15 and I can tell you that something bad is going to happen. To quote Kirk Fryer (District Manager) of Farmer’s Insurance, “Make sure you have a bad day, and not a bad life.”
D. Don’t forget to account for refunds. Sure, you are genius and you will never have to give refunds, but every other company will. Refunds are going to happen, either because a customer is nuts, or because one of your employees decided to smoke pot before his last shift.
E. Don’t forget to account for theft. Stuff is going to get stolen. As our country drifts farther and farther from its founding ideals, morals and values, more and more people are justifying their behavior based on their morality. “Situational morality” is becoming a big part of our lives. Basically, person A is hungry. Person A takes your lunch and doesn’t feel bad about it. This makes me want to punch a Koala when I hear it or type it, but it is going to happen. Account for that stuff.
F. Don’t forget to account for banking fees. Although it might seem strange, banks are in business to make money. They are constantly coming up with more and more ways to take your money by offering “better service.” They’ll say, “we will even come to your office to pick up your checks, so you don’t have to leave your office!” And for a fee, you could also probably get a guy in your office to glue his nipple to a desk. But those fees add up.
G. Don’t forget to account for shipping and handling. It costs money to get items from A to B. Thus, as you put together your spread sheets and as you organize your initial start up costs, you must factor in the costs of shipping and handling. It adds up quickly and if you don’t factor it in, as an owner you will never get paid.
H. Don’t forget to factor in the “embedded costs” of hiring every employee. I have seen some pro formas and costing sheets that simply factor in the hourly amount that an employee costs a company, but this is not accurate. Every employee other than Chuck Norris must be managed, that costs money. Every employee must work somewhere, and a lease or the purchase of a building costs money. Every employee must have a computer, internet and phone, this costs money. Every employee must have access to a restroom, this costs money. Just make sure you list all of the costs associated with bringing on an employee.
I. Don’t forget any costs. Go through your costing sheet 50 times if you have to, but do not forget any costs, or your business life will quickly be in utter ruin and your demise will happen shortly (that sounded threatening).
Rule #5: No one wants to work for a poor boss.
My friend, it is absolutely essential that you pay yourself more than everybody else who works for you, because you are the boss. You are risking your savings, your time (which is your life), your energy, and everything you have to start a business. Don’t feel guilty for paying yourself well for a job well done.
Rule #6: Use merit-based pay to reward “great work” with “great pay.”
“Good is the enemy of great” – Jim Collins
It is absolutely important that you allow for great bonuses and great pay for “great work.” Survey every client. Measure everything so that you can give generous bonuses for those that are really producing “great results.” Don’t give bonuses for “working hard.” Give bonuses for “great results.” Survey your client and give bonuses to your team members who WOW the clients time and time again. Make a show about it. Honor them publicly. Everyone in your company should know who does great work and who does good work. Everyone must know that you give bonuses only for “great work.”
**For more information on creating and implementing a merit-based pay system read and apply the principles found in “The Service Profit Chain” by James L. Heskett. This book was put out by Harvard Professors and this book shows you step by step how America’s most successful companies are using this system. If you are stumped, visit www.MakeYourLifeEpic.com and send us a message. We will help you do this.
Rule #7: Make sure you are achieving your financial goals
After adding up all of your costs, if you don’t make enough money on a “per product / service basis” to achieve your goals, adjust your numbers. Keep adjusting your numbers until you are making enough money to make it worth it. Don’t start this business just because you “already have a degree in this area” or because “your father was in this industry.” You have to make money to make it worth it.
Rule #8: Automate and outsource when possible
If you can automate each transaction with an online shopping cart, do it. If you can outsource or automate any part of your business do it. Automated shopping carts, never show up late, they don’t “get tired because they got into a fight with their girlfriend,” etc… You are in business to make money. Stay focused.
**If you need an example of what a detailed costing sheet looks like contact us by visiting the site at www.MakeYourLifeEpic.com. Request a copy of these costing sheets, and we will get you one. Examples are available in an excel format. If the very thought of “accounting” makes your brain explode, please contact our team at (918) 851-6920. After years of business coaching we have developed a network of nation-wide accounting professionals that we would be happy to recommend.