By Sherry Lutz Herrington
Whether you are just starting a business or you’ve been running yours for a while, it’s critical to understand how your business is doing financially at any given point. Having solid business accounting will help you accomplish this and keep you on track. It will also give you other critical information. And it will help you to analyze where things stand so you can determine what you need to do to get your business to the next level.
When you first start a business, it can take a while to get established. It may seem like you’re running on a hamster wheel: constantly in motion but going nowhere.
That’s a very frustrating place to be. No one starts a business hoping to work hard but not make any money. But how do you get past that point?
First, let’s look at what it typically takes to start a small business. Generally speaking, it takes an investment in cash to get a business set up and running. Depending on the size and type of business you’re running, this initial funding can come from your own pocket or it might take a startup loan.
Either way, you’ve got to invest money to make money.
Starting out you have a lot of setup expenses. These may include establishing your brand through a logo and website, opening a storefront or office, setting up a warehouse or manufacturing plant, purchasing product to sell, hiring staff, creating and implementing a marketing and sales plan, setting up a good accounting system, and more. Some of these will repeat. But once you have sales coming in, you should have the money to reinvest in them as needed.
The problem comes when you spend more than you’re bringing in. And, frequently, it takes a while for sales to take off. During this time period you’re often bootstrapping your business to keep it going. It may mean infusing cash from your personal funds, bartering with others to get what you need, keeping overhead low, or running yourself into the ground trying to wear too many hats. It can be a struggle to get a business to be profitable.
The key is getting to the tipping point.
The tipping point is when you have enough momentum going so that sales are increasing at a greater rate than the investment needed to keep the lights on and the doors open.
Once you have completed the initial setup, many of your expenses taper off. If you have to purchase equipment, at some point you’ll have most if not all of what you need. Therefore, you won’t need to spend any more money on equipment. If you need staff to produce your product or service, there will come a point at which the amount of income the increased number of people can produce will be larger than your ordinary outlay of expenses. Even with the ongoing cost of producing your product or service, you should be able to get to the point where your sales are high enough to consistently outpace your regular expenses.
For some businesses, the tipping point comes fairly quickly. If there is not a lot of investment needed to start the business and you can get the sales up quickly, it shouldn’t take too long to have sales outpace income.
For others, it will take a bit longer. If you need to invest heavily in setting up, then it will take a while to get everything established. It’s likely you’ll be running in the red until everything is in place and running smoothly. Or, if you have a business that takes a lot of initial setup before you can open your doors, then it might be that you start out underwater and have to focus on bringing in sales of a certain level to pay back that initial investment and cover daily operating costs.
Statistically speaking it takes 2-3 years for small businesses to be profitable.
That’s a wide range, and of course, it can be done sooner. However, controlling your costs and planning your investments up front will go a long way to maintaining your position until you reach the tipping point.
Lay out your anticipated costs for one time setup expenses as well as for ongoing overhead. This will help you determine how much you need to invest or borrow to get your business off the ground. Then you can lay out a sales and marketing plan to obtain the needed sales to cover the costs. If there is a shortfall, estimate how long that will go on. Then plan accordingly so that you make it to the tipping point.
This isn’t just true of brand-new businesses. It can also apply if you are in a growth phase. If you want to expand your business, either into an additional location or a larger space, increase your staff or expand your product line. You might find yourself struggling again for a while. But once the sales catch up with the changes, you’ll hit another tipping point and be back in the black.
Know that it takes a while to break even. Planning for it can make the difference between success and failure for any business.
Strategic planning, good accounting, and diligent oversight is the smart way to ensure that your business makes it to the tipping point and beyond.
Once you reach the tipping point, then the momentum will typically continue to build. You will be out of the trenches and on to the next phase of running a solid, financially successful business.
Sherry Lutz Herrington is the owner of Sherrington Financial Fitness, a business consulting and accounting firm specializing in strategic business planning and solid financial accounting for businesses. She is also the author of Strong Women Thriving (www.strongwomenthriving.com), a blog which focuses on empowering women to be financially savvy, particularly after experiencing financial abuse. Sherry is currently writing a book that both shares her personal story and addresses financial abuse. She can be reached at firstname.lastname@example.org.
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