After the umpteenth small business advice, I think it is worthwhile to rewrite the most basic small business financial mistakes.
What they have in common is that the small entrepreneur works hard, struggles, knows his profession well and even thinks he is successful in the market, but he has everyday penny problems and doesn’t know where the mistake is.
What is your cost?
My recent client explained that when they calculate a price, they don’t forget to include the $ 6,000 overhead rate in the final price. When I asked how this number came out, the only answer was that everyone in the profession counted so much.
This is where the first and most serious problem begins. We have no idea what the real cost to the company is and how it should be allocated to production.
We only know the wages of the employee and the cost of the raw material (although sometimes there are serious problems in determining the cost of the material), we do not count on anything else. However, everything has to be added up and divided for working hours. The mean everything to everything. Fax paper, phone bill, monthly cost of accountant, rent and insurance of office space, annual cost of air conditioning for office, cost of repainting warehouse every three years, marketing expenses, payment of administrative staff, everything, everything, everything that ever comes about the company.
If you have four production employees and one administrative employee, you will be required to redistribute the one-year cost based on 4 × 8 working hours a day, 22 days a month, and this will be an item of the overhead rate.
To do this, of course, you need to make a note of all the expenses you incur in the life of the company, be it as small as a $ 300 parking fee.
All you have to do for this task is accurate administration and common sense. You add up everything and divide that amount by eight hours a day for the four productive workers in the example. (Didn’t you forget that every employee is not working 35 days a year on holidays and there are paid holidays as well as sick leave? That is, an average employee only works 10 out of 12. So the above 22 working days is not 22 days really , but only a little over 18 days.)
That’s the damn depreciation
It is a constant problem that small businesses forget to depreciate their production assets. If you bought a machine for $ 10 million, worth $ 1 million in 9 years, you would slightly simplify the depreciation of $ 1 million a year, or $ 83,000 a month. If the machine goes 120 hours a month, then the depreciation of the machine is only 700 HUF per hour, and where else are the maintenance, refurbishment and maintenance costs? It’s just a release that, after 10 years, the trash is a productive device. Get $ 6,000 in overheads.
But I hope you haven’t forgotten that your business office computers are also depreciating. If you buy 3 new laptops in the office every three years for 700,000 forints, then re-stock it. And cell phones. Yeah, and of course the value of cars, which is also millions of items a year. These must all appear in the overhead rate.
I wrote an informative article about this earlier.
Thus, the overhead hourly rate includes all current costs divided by the depreciation of capital goods. But we’re not done with that yet.
What will you develop?
Most small businesses forget that it takes money to develop, and they forget to calculate the price to be charged to their customers. Since he did not calculate the commitment price, he would have to make up his own pocket and develop his business from his private assets. Well, that is why he will never have money, because he is going through a new means of production, so his company will not increase his wealth, but on the contrary, will constantly lose it due to development needs.
Therefore, calculate in advance the direction and cost of the expected improvements and add it to each job. Because if you don’t, you will not understand why you are constantly being poor and not gaining.
Need a new machine in two years for 8 million. In the meantime, we will be generating 13,800 hours of work with the four people, so $ 580 is still to be added to the overhead.
Capital also costs money
Another common mistake is that people forget the cost of capital. If I have $ 50 million in the firm’s fixed assets, I can’t put it in the bank, so I lose interest on it. If I count on a 4% return every year, then I have 2 million bucks as an owner to keep my capital here, let’s say, in stock. That’s 6,900 working hours a year for me to spend 290 forints as an owner.
Here I wrote an equally instructive article that there is a business that seems to be profitable because we miscalculate it.
If you calculate all of the above items with honor, you will get a rough estimate of the minimum cost you would have to put in for each job to be at least zero .
If you work during this, you are only making a loss.
But once I get into that, let’s look at some other common issues.
Never belong to the tax office!
Most loss-making businesses live much longer than they should because the owners make up for the losses with tax office money, deceiving themselves because they do not realize that they are making week-to-week losses.
They don’t pay VAT, they slip in with that. First they only roll a week or two, then a month or two, and finally millions of debts.
The tax debt is very fraudulent. The tax office does not call you weekly as your supplier, you do not turn off your phone as your mobile service provider, so many people are patching deficiencies with tax.
However, when the debt reaches the tax office’s stimulus threshold, it becomes the worst lender, and it is also favored by law. He’ll be your nightmare, whatever you do, seize or withdraw all your money from your account anytime you even have a debt.
Never walk into this trap. Taxes should always be paid on time. If you can’t do this, it should be an alarm for you that you are likely to lose your business and it is better to change or quit it as soon as possible.
Cash flow and profitability are two separate things
We call cash flow the company’s cash flow that there is always money to pay the bills. It has nothing to do with whether you are profitable!
You can be terribly profitable, but if everyone pays late, you can ruin your company by the way, otherwise your profit margin was 100%.
That’s why it’s so important to have cash flow management so that you have cash on hand at all times.
It is therefore prohibited, for example, to invest in working capital from working capital. Because production will be more profitable with the new machine, only the company will die because of a lack of working capital.
Of course, if you always produce at a loss, sooner or later it will affect your cash flow. Very often, the lack of cash is due to loss-making production. This is a very serious symptom of the fact that the production of a company may not be profitable.
Is it my money or your business?
Many small entrepreneurs mix the money of their company with their own, find the corporate cashier, then pay the company costs out of their own pocket, bring the kids home from school with their company car and more.
The end of this is a big catwalk, and you will have no idea how much profit your company is making now, or if it is profitable at all.
Make a clear distinction between corporate and private spending, otherwise you will be unable to see clearly your finances and you will not be able to make good financial decisions.
The solution is as simple as a tree fringe: give yourself a paycheck and spend just that. (Not necessarily in the tax sense, I’ve written about this before.)
Why do you want to serve everyone?
I constantly hear that many small businesses take every job out of habit, so there’s no time to make money. Uncle Józsi is turning a new shaft for a handful of rice, or she is upgrading Aunt Joli’s hundred-year-old furniture for buttons.
Often you cannot afford the luxury of undertaking such work.
20% of clients generate 80% of revenue and 80% of problems are generated by 20% of clients who typically come from a circle that is otherwise unprofitable.
In this case too, it was suggested that up to two people out of four could be sent off if they did not take up the urinal work. For the 80% of the work, the remaining two people are enough and the cost to the company would fall so that with less work the company would probably earn more.
Forced to grow
I talked to a lot of people who told me that they were really looking good until they worked alone or as an assistant at the company. Then they started to grow, the company already has 30 employees, but actually the boss takes less money home than when he worked alone.
The question then arises, what are you doing this miracle?
A guy also repaired furniture at the house and the store went really well. He had an assistant, a broken van, and he was looking for coal.
Now, in a huge leased premises and showroom, he deals with dozens of people in the furniture repair, furniture manufacturing and sales industry, with a huge inventory and headache, and can bring home less than before.
But as I said, this is a surprisingly common occurrence.
So don’t want to grow at all costs! If, based on the above, you calculate how much you need to earn and calculate in advance that your profits will grow at least linearly with growth, then increase, otherwise not. Growth only makes sense if your profits grow, not if the size of the company, the headache, the risk and the amount of work just grow.
Never without a down payment
I talked to someone who made millions of pieces of cut metal parts but refuses to pay upfront because what they don’t trust is that they will only be paid when the job is done.
Never be so naive and irresponsible. First of all, we do not shop with a company that cannot pay half of the work in advance. Such a company is a sham, you can say goodbye to your money for the slightest disruption.
Why should I trust him, trust me. If you make something and don’t take it over, you can then apply it on your hair, you can’t sell it, just scrap.
Related to this is to always perform a stress test on your company before taking on any work. This means looking into what your business would be like if you did not get paid for this job, or if you were only paid 90 days late, or you could be fined if you missed the deadline.
If your company gets stuck, if the job is unpaid, or you can’t manage a tens of millions of penalties, say no to the offer, no matter how attractive it is. It’s just too big for you.
Never stand on one foot!
It is a recurring phrase that an entrepreneur spends all his money on his business because he brings the most there.
This is very dangerous and short-sighted.
Just as we do not keep all our money in Hungarian government securities, let’s say in Google stock or whatever, so we cannot have all our assets in our own business.
Enough of a clumsy accountant, a fraudulent business partner, a bad business decision, a $ 200 million lawsuit, anything and all your life’s work will be nullified.
Therefore, it is important that you do not take all the money out of the company so that it can grow (if it makes sense, see above), but it is just as important not to keep all your money in the company.
How much do you want to earn?
Doing business makes sense if you earn at least three times as much as if you were an employee. You have the risk, the responsibility, the non-paying customers, the problems, the tax obstacles and everything else.
Decide how much you want to earn on the net and start counting down how much revenue or profit your company should make.
There has been advice that has come to an end that since there is no way to get enough income out of the company to make a decent employee salary, you have to close the company and go out as an employee.
There’s nothing wrong with that, but a lot of people don’t dare to face it, and for years they only produce the minus. Don’t be afraid to face the facts.
Since the volume has slowly become a book rather than an entry, I will stop now. I hope I was able to help you a little bit with what you should look at in the finances of your business.
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