Meet Renaldo. He was always busy with jobs and he had happy customers and a top-notch reputation in the community so why couldn’t he pay himself a salary?

Running a successful business isn’t about how busy you are as an owner; it’s about managing your finances effectively.

Despite having a reputation for success, many small business owners struggle with one common challenge: paying themselves a fair & consistent salary.

Business owners often overlook key financial metrics, leading to uncertainty about their monthly finances. Focusing solely on profitability without understanding which jobs are most profitable can be detrimental. This oversight can result in business owners inadvertently becoming their lowest-paid employees, mirroring Renaldo’s situation.

It’s crucial to account for costs related to labor, materials, equipment purchases, payroll planning, and other overheads. This ensures that there’s enough money in the bank at the end of the month, preventing potential financial shortfalls.

How do you move your business from life support to financially healthy, and pay yourself?

  1. Labor Costs: How much are you spending on people? This is one of the largest expenses for most businesses and it’s important to factor in both wages and benefits in your calculations. Once your number is calculated, it needs to be measured over time. Compare this month’s costs to last month, and the same month last year.
     
    Another important metric is the industry standard. A labor cost benchmark for some service industries is 20%. This means that for every $100 in sales, $20 or less should be spent on labor.
  1. Material Costs: Now that you know your labor costs, next you want to calculate how much you’re spending on materials (if this applies to your business). Material costs include the money you spend on items needed to make your product or provide your service. Once you have the numbers, you need to measure them against both your business and industry standards.
     
    It is also important to look at how purchasing new equipment, and how equipment expenses impact the business. Calculate these numbers as well. If the projected cash coming into the business from the use of the new equipment is greater than the cost of the payment for the equipment, then you can afford the purchase.
     
    It is a good idea to finance the equipment over a period of time based on the projected life of the equipment. So, if the life of the equipment is 2 years, finance for less than 24 months. By doing so, you are using someone else’s money to build your business.
  1. Payroll Planning: Is there money in the bank to cover payroll?  Like many Americans, many business owners are living paycheck to paycheck. It doesn’t have to be that way in your company, but it does take some planning.
     
    Look at the money coming into the business. Where is it coming from? Is it enough? Are there any areas of the business that could be bringing in cash, but aren’t? Are your prices and margins too low? Changes to the business, even small ones can put more money in the bank and end those payday fears once and for all.
  1. Analyze Job Profitability: Was the job profitable? This is one of the most ignored questions that can keep a business in a never-ending race to keep getting the next job just to pay the bills.
     
    When you complete a job take a look at how much money you made or lost as a result. Were your costs more or less than what you charged? If the costs are higher than the price charged, you need to understand why. Can you reduce costs? Should you increase your price? By understanding profitability job by job, an owner can adjust costs and seek out jobs that are more profitable.

Understanding and managing key financial metrics is essential for the success of any business. By learning from Renaldo’s experience and implementing sound financial practices, you can ensure the long-term health and prosperity of your business.

As an expert in your field, you know that expertise and experience are valuable. You don’t want a homeowner messing around with his plumbing or his roof, so don’t try to handle the expenses and financial side of the business on your own. By doing so, you’re putting your business and employees at financial risk.

Instead, why not get off the money roller-coaster once and for all? Reach out to TurboExecs to schedule a free financial health check-up today.
 
 

Your CPA Shouldn’t Be Your CFO!

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