Profit (n.): the excess earnings over expenditures you make from providing services or selling products
Breaking Even (adj.): the point or level of financial activity at which expenditures equal income; no profit or loss
Is your business making a profit? Most people truly believe they are. But if they were to sit down and really add up (for simplicity) all of the income they make and subtract all of the expenditures, they will find that they are only breaking even or netting a loss.
So why is this important? In order to truly know if you are in business to make money or not you need to know if your business is in fact making money. This will solidify that you are officially running a business. To help you get started, here are 3 signs that your business may not be making a profit and may be breaking even.
1. High loan or line of credit balance. A lot of business owners get loans to help finance the start up costs of their business. And there is nothing wrong with that as long as your business plan includes the costs associated with repaying the loan (principle plus our good ole friend interest expense). Also, taking advances against your loan or line of credit is not income to your business. Without any income to offset these repayments, your business is netting a loss. An increase in the balance of a loan or line of credit coupled with a net loss not only tells your accountant how your business was funded but also how it survived during the year.
2. Excess products on hand. If you are a product based company STOP BUYING YOUR PRODUCTS YOURSELF! How can you make any money if you are constantly buying your own product? Some years ago I worked at Bath and Body Works (not my own business but the analogy will get the point across that I am trying to make). I worked there to earn extra income to help pay off some bills and help fund my wedding. I picked that store because I never shopped there. Little did I expect to spend 3/4 of my weekly check on the products. I wanted them all – every scent! The end result, I didn’t make any money because I was spending it all on the product. The same applies to a product based business. Don’t keep buying the product because you get such a great discount. That’s not investing in your business; its burning your cash flow.
3. No profit change. So you are generating more revenues but your bottom line is the same. This simply means that your costs increased by approximately the same percentage as you income. The solution – get a break even analysis to determine the price point you should be charging to come out ahead. Not only will it help your profit & loss show a profit, it will also help increase your cash flow because you will be know the fees you need to charge in order to generate a profit.
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