Understanding Your Business Costs - The Difference Between Success and Failure
BY ANTHONY CORSANO
Entrepreneurs do not get into the decorated apparel business because they love bookkeeping, accounting and analyzing a profit-and-loss statement once a month. But the truth is, if you do not have someone in your company doing these tasks, you may find yourself in financial trouble or, in a worse-case scenario, out of business.
The first rule of commerce is to understand your costs. For the new decorator, this must happen in two parts. In the beginning, as you build your sales, if your shop runs at only 10% of its capacity, you can’t charge enough to be profitable. You just have to eat the losses until you're up and running at a certain level.
If you are truly starting from zero, you should have at least 90 days of fixed operating expenses in reserve. Then hope your sales will catch up to expenses.
Part two is when you start hitting your shop’s capacity, and you have to understand what your costs are now. This is important because your fixed costs become a smaller percentage as your sales grow.
Ultimately, as your business begins to scale up, you should always have an understanding of your true costs, and are you selling a product that is making money? While you can’t perfectly predict monthly expenses, you should be able to come up with a reasonable average.
Hand in hand with starting a business is understanding some of the fundamentals.
What Am I Going To Charge?
This answer is a byproduct of several factors. These include what you have to spend to produce the product. Add in the market price, which is how much can you charge and still write the business, which is influenced by what competitors are charging.
In the case of newbies, there is a lot of pressure to do whatever it takes to get the business. But time and time again, it has been proven that lowballing is not a good, long-term practice. Make sure you are always covering your costs.
Conversely, you could spend significant dollars early on obtaining customers from advertising. Potentially, this could be a good use of money, because once you've secured them, you don't have to necessarily spend the same amount of money to keep them.
Unfortunately, this is an industry where, in a lot of cases, it’s a race to the bottom. You have to be strong about charging a fair price with a good margin. You also have to understand what services you provide, the level of quality and what sets you apart. I’m a proponent of increasing prices until you have found the perfect balance between the top line and the bottom line of your business.
Find A Mentor
If you do not have the knowledge and expertise in finances when you are first getting started, I recommend finding a mentor. Ideally, it’s someone who's been in business, understands it and is willing to share some of their time with you. If you can find someone who will spend 30 minutes a week, an hour a week, or an hour a month, that's the most invaluable.
The second most valuable way to gain the knowledge is to look online. Research some courses, conferences, tutorials, etc. and start studying.
You Better Have A Budget
Without a budget, you cannot know what your costs are going to be and if you will have enough money to run the business.
The same goes for having a business plan. It’s current for about a day. As soon as you finish it, it’s going to start changing, but it’s still a foundation you should start with. It’s a standard from which to measure your progress.
It’s good to have something in writing that states what your objectives are and how you are going to reach them. If you organize this into a chart with deadlines, you have a clear plan on what has got to be completed before you do the next task. And that is invaluable.
How To Tell If You’re Making Money
Each month, you have to create a profit and loss (P&L) statement that tells you where you are. For example, did you make 20% or did you lose 10%? What you are striving for is to improve on a monthly basis. When you put pencil to paper, you have to see sales rising and be able to project. For example, “If I continue to grow sales by 10% a month, in 12 months I estimate my sales to be X amount of dollars.”
Begin with figuring out an average, but then, on a daily basis you have to look at the work you did that day and determine if you made or lost money. Otherwise, you'll wake up with a large business that's successful, but almost by accident, because you do not understand which jobs make the most money and which ones lose money.
You might get lucky and by default, make some right decisions, but over the long term, you are better off making more right or wrong decisions by having thought it out rather than just letting things unfold.