Understanding Your Costs Will Lead to Higher Profits
Your cash flow is the single most important aspect of your business. Understanding cash flow focuses on the cash going in and out of the company.
- How much money did the company receive from sales?
- Accounts payable are all the expenses that the company has to pay.
- Accounts receivable is all the money owed to you from customers.
Cash flow problems are common in business, BE AWARE OF:
- Too many receivables (people who owe you money). Banks will look at receivables over 90 days as a bad debt. In some cases if someone does not pay within 90 days you may never get paid.
- Too much inventory (cash tied up in inventory for too long) Inventory should be turned over at least 5 times a year to maximize profit. Think about all the different ways to sell products and services. Items that have not sold could be discounted to create cash flow to purchase other best selling items.
- High overhead costs. Always be aware of all the money being spent and consider ways to reduce costs. Always know where the money is going. This can affect your profit margins. Low profit margins mean that the prices are too low and the costs are too high.
Common examples of unrealized costs are:
- Payroll expenses. An employee paid $20 an hour…it is not only $20.00 an hour there are other costs that must be realized, federal and state withholding taxes, benefits, payroll costs. It could add up to an additional 15% to 20% over the base pay.
- Shipping costs for the inventory being sold. Total cost of the item plus the cost that you paid for shipping.
- Identify all variable and fixed costs during the course of doing business.
Every cost has to be recognized so that your products and services can be priced properly. The goal is always to make a profit and enough profit to cover all costs and to continue growth in the business to create success for many years to come.