Why Understanding Your Business Finances Matters

Did you know that you can sell yourself out of business? Did you know that you can have cash in the bank, even if you’re losing money? This video will explain the importance of understanding your business finances and how it will help you make sure that you get the most out of your business.

Hi, I’m Doug Barra. In this video, I will explain what you need to know about finances for your business. What are those things that make such a difference that it could actually have you be completely underwater if you don’t understand them? The first important thing about business finances is the way that you do your pricing. Pricing of products and services can make a big difference in whether or not your business will be successful.

Yet, so often, when I talk to business owners about their finances, they don’t understand one simple concept. They don’t understand that they have to make sure that they are making more from what they sell than what it costs them. What!?! That’s crazy! You might be thinking: Of course, I know that I must make more than I’m paying.

Here’s the thing. Business owners often don’t properly understand how to calculate what they’re paying. So they don’t actually know that their business is being profitable all the time. Let me give you an example. A client of ours did tours for groups. When we were looking at the profitability of the tours with them, they were only looking at the overall profitability of all the tours during any given period.

When we drilled down, we found two alarming things that made a huge difference in their business. First, we found some individual tours that did not make money. The expenses for that tour were more than they charged for the tour. Second, we found some individual tours that were not profitable for smaller groups. Fixing these problems made a huge difference in their profitability overall. The thing to get from this story is that you need to know the profitability of every single product or service that you sell.

Here’s another example where the owner did not properly understand how to calculate the profitability of their products and services. This owner had a business selling and installing high-end audio visual and home automation systems. He was struggling with always needing to sell another system to finish paying for the previous system.

He thought it was just that he was always ahead of the billing. Unfortunately, when we looked into it, he was pricing by adding a competitive markup to the actual equipment costs to cover the installation. What he wasn’t figuring into that equation was when the installation went wrong, you see, he often had to send his technicians out two or three times to get the installation. So the costs were significantly higher than he thought.

You have to really look at the full costs of your product or service. This has to include things like labor, commissions, even credit card service fees. I don’t want us to confuse overhead or fixed costs with the cost associated with our product or services. The costs associated with your product or service are anything that you would not pay if you didn’t make a sale.

Now, all you, Accounting majors or bookkeepers out there, I do understand that this is not how accounting looks at the cost of goods. For those of you that don’t understand what I just said, ignore it. As an entrepreneur, we want to know the cost of sales because it’s critical in understanding our breakeven. Now don’t glaze over on me here!

I know I’m getting deep, but the effort will be worth it. I promise. So I mentioned breakeven. Let me take a moment and explain what that means. In the simplest terms, it means how much you have to sell to pay all your expenses. Now, your first thought might be, I have to sell the same amount as my expenses. This is another place where entrepreneurs get caught because the correct answer is more complicated than that. This is why we have to split overhead or fixed expenses from the cost of sales. You see, your overheads stay basically steady, but your cost of sales is directly related to your sales.

Here’s another example of a client of mine. In this case, they were examining an offer for marketing from an advertising agency. The first proposal was too expensive for them, and the agency wanted the business. So they offered a percentage of the business they brought in. They said we’ll take a sliding scale, starting at 20% and reducing to 8% as our sales grow, all you have to pay for is the ad spend plus $500 to offset our expenses. You might think this is a good offer.

Luckily, my client understands their numbers. They know that their cost of sales before the advertisers is 84% of their revenues. That only leaves them 16% to pay their bills. If they pay 20% to the advertisers, they don’t have anything left over to pay for the ad spend or the extra $500, not to mention the rest of their expenses. Even if my client were to foot the bill until the agency got to the point of the 8%, the return on ad spend would have to be on the order of 15 times for my client to make any money at all.

In this scenario, the only people that would make money are the agency. I hope you see how critical this is. This is just a small sample of what we cover in the Master Business Growth workshop that will be occurring next week, click the link to secure your spot in this powerful program.

The best thing is that the workshop is absolutely FREE because I am committed to bring the possibility of a successful business to everyone. I’d love to know what value you got from today’s video or what questions you have. Leave me a comment. I look forward to reading what you have to say.

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Once again, I’m Doug Barra. And now it’s your turn. Click the link, get yourself registered, and I’ll see you In our next video.