While an increasing number of businesses are opening up, failure rates are also on the rise. In fact, nearly half of startup companies fail within the first four years.
According to Dawn Fotopulos, an entrepreneur and author of the acclaimed book, Accounting for the Numberphobic: A Survival Guide for Small Business Owners, many are ill equipped to succeed because they don't understand what success is. They can't define it because they can't see it when they read the numbers in their company's financial statements.
Too few small business owners can read their own financial statements, which explains why a high percentage of startups fail. Business owners often make excuses for not understanding the numbers and typically defer their misunderstandings to their accountants. However, no one is as invested in a business as the owner, so it is important to be aware of the operational functionality of his or her company's success.
Here are three steps for business owners to improve their profitability:
Step 1: Make sure you are charging enough for your product
The long-term sustainability of any business largely depends on the profitability. Identifying your target customer demographic is an important first step in developing a pricing model. Investigate what your competitors are charging for a similar product. While it is important to offer competitive pricing, you don't want to price your products too low just because your competitors are doing it. Yours may be a value proposition, not a price proposition.
Successful entrepreneurs are in business to make money. Thus, it doesn't matter if you are handily outselling your highest competitor if your balance sheets and income statements are deep in the red. Consider all of the costs and investment of the product that drives your business. Every industry is different. Carefully evaluate how much your product/service is worth.
Step 2: Maintain a positive cash flow
While it may seem obvious, assuring that your company maintains a positive cash flow is essential to long-term viability and growth. Seasonal businesses often run into cash flow issues during slow months, so planning is critical. Businesses that don't have enough money to pay their employees or utilities, may have to borrow money to fulfill their obligations. Understand your current and future debts. Forecasting revenue and expenses in a best and worst case scenarios is a great exercise to prepare your business for the vagaries of operation. As the Boy Scouts say, "Be prepared."
Step 3: Be conscious of your expenses
Although knowing your revenue figures is good, being conscious of your expenses is just as important. Expenses can derail a business. Staying up-to-date on bookkeeping enables business owners to understand their cost structures, and prepare for variable expenses such as inventory and long-term investments, as well.
One doesn't have to have an MBA to understand how to run a profitable small business. However, it's important have a grasp of numbers that lead to profitability. Dawn Fotopulos is presenting a free three-part webinar series designed to help entrepreneurs improve profitability and cash flow,. Her first presentation "Unlocking the Secrets to 50 Percent More Profit, Cash Flow and Growth" will take place on Wednesday, November 18. Her presentations are always lively, informative and valuable.