Counting Your Business Costs
by Steve Marr
A carpenter in Minnesota dips into the family budget every time a power tool breaks and needs replacement. A Tennessee roofer is unable to pay his helpers when a customer fails to pay the fifty- percent balance owed on a job. In Michigan, a florist can't afford to replace a delivery van with 180,000 miles on it. These are common dilemmas for most small business owners. Developing an effective strategy to save for future business needs can be the difference between sinking and staying afloat when something breaks or just needs to be replaced. King Solomon wrote, "The wise man saves for the future, but the foolish man spends whatever he gets" (Proverbs 21:20 TLB).
Quoting jobs on a too-thin margin is a common cause for cash flow shortages-a problem encountered by both the roofer and the carpenter in the above example. In an effort to write winning bids they were factoring in only the cost of materials and labor needed for each job, while ignoring their fixed overhead. However, equipment replacement costs, bad debt losses, and warranty expenses are real costs for any business and must be considered when pricing jobs. Many businesspeople fear they will lose important business if they raise their prices. This concern may or may not be founded, but one thing's for certain: Failure to cover all your costs of doing business is a prescription for ultimate business disaster.
Start with effective planning. "The plans of the diligent lead to profit, as surly as haste leads to poverty" (Proverbs 21:5 NIV). A tradesperson may not know which tool will break and when, but everyone knows that out of several thousand dollars worth of tools, something will need replacing on a regular basis, just as any work truck or delivery van will eventually need to be replaced. Set aside money from each job in a separate account (anywhere from five to twenty percent, depending on past experience) and discipline yourself not to use that money for other purposes. Keeping your equipment fund intact is crucial. An organization that is unable, or unwilling, to save for the future is destined for a shipwreck, sinking further behind each month.
Establish a business budget that factors in every possible expense, including bad debt, equipment replacement, warranty expenses, inventory spoilage, and any mistakes that you or your employees may make. Then adjust your business plan and pricing schedule accordingly. Next, estimate your jobs realistically over the next year and determine the price you should be able to obtain. Will your projected gross revenue cover all of your operating costs and provide for your family's needs? If the answer is no, take time to review the numbers and determine what steps you can take to balance your financial plan. Do you have ongoing costs that can be eliminated? Can you raise prices without losing business? Can you cut back on hired help and do more of the work yourself?
If your best-laid plans fail to meet your anticipated costs, you have three options: (1) Plunge ahead hoping that all your equipment and vehicles will keep running forever. In other words, hope against reality that nothing bad will happen. (2) Reduce your family budget to live within the likely available income. (3) Consider the hard reality that you might have to close the business and find a job elsewhere. Some folks would rather earn less money running their own business than work for someone else for more. However, reality eventually dictates that we face our financial needs squarely. Recognizing and planning for all business expenses will make the difference between long-term success and failure.
Steve Marr is a business/ministry consultant and author of the book Business Proverbs. His daily radio feature, "Business Proverbs" is heard on 1,000 radio stations. He is the former CEO of the fourth largest import-export firm in the United States. Website: www.businessproverbs.org