Plenty of Revenue- Not much Profit

When an entrepreneur is working flat out and a lot of cash is passing through the till, it feels like the business is going really well.  Cash is not profit and working hard may not be working smart.  It is important for the small business owner to have a good grasp of the bigger picture in order to prioritize the spending of money and time. This is where a solid business plan comes in.

In all of the day to day chaos of running a small business, it is hard to find time to sit down and look at the financials.  Yet if you do not make time to do it, you could be in for a bit of a shock come year end.  Especially in businesses that deal with a lot of cash such as restaurants, it is common to feel like the business is profitable, when in fact it may be losing money.  Cash flows in and out of a business.  The owner buys supplies and labour, then turns them into goods and services.  Customers in turn buy the goods and services and the owner buys more supplies – but what about overhead?  Look up; those lights cost money to run, that roof requires rent. The garbage collection costs money too, and don’t ever forget the tax man.

How can an entrepreneur know if they will have enough to cover all of these costs?  How will they know how much to charge and what they can afford to pay their staff?  How will they know when it is okay to quit their “day job”? The business plan.

When you write a comprehensive business plan before you beging, you have something to measure your performance against.  Not as busy as you thought you’d be?  Go back to the plan and try again with lower sales figures.  This will show you where you need to cut.  Is one item in your inventory selling out quickly, but you are still not making much money from it?  Go back to the pricing section on your plan and readjust your pricing to increase your margins.   A business plan is not written in stone and life rarely goes according to plan, but once you have it written, you have a useful tool with which to guide your business to profitability.

What are some of the ways in which you have modified your business plan as time has passed?  What do you use as your profitability yardstick?