We hear time and time again from the small business owners we deal with – cash flow is their biggest bugbear!
When we start delving into the ins and outs of their monthly accounts, however (namely what’s coming in and what’s going out), it’s often the case that they haven’t got a handle on exactly how much their business costs to run.
How can you work out what you need to bring in, if you’re not quite sure what money is due to come out each month? If you don’t know what overheads you have to cover, you can’t work out your pricing to ensure your profit can cover them.
- What regular expenditure or operating costs do you have?
- What will your phone and other bills cost?
- Are you outsourcing services, like accountancy or admin? When are these costs due?
- What consumables will you need for the jobs you have planned in?
Getting a grip on your fixed costs (that come out every month), and your variable costs (that change depending on the jobs booked in) will help you manage cash flow far better.
So, with that in mind, here’s an exercise we suggest you take time to do sooner rather than later, to help you stay in control of that irksome expenditure.
- Brain-dump
Start by listing EVERYTHING you spend money on in your business onto paper. At this stage, it doesn’t matter how big or small the cost is, or how frequently or infrequently you spend on it. Just get it down in black and white!
It might help to get your last 12 months business bank statements in front of you to remember some of the things you’ve spent money on.
These are some examples of costs you might have, but it’s not the full picture – we’re pretty sure you will think of more!
- Premises
- Rents and Facilities
- Utilities: Electricity, water, and heat
- Van
- Lease or loan repayment
- Petrol
- Van servicing and maintenance
- Insurances
- Public Liability
- Tool/equipment insurance
- Van insurance
- Salaries, including your own!
- Mobile phone contract
- Office supplies and equipment
- Invoice / Receipt books
- Paper / Diary / Pens
- Computer / Printer / Print Cartridges
- Software (such as computer anti-virus software or professional admin or accounts software)
- Materials
- Tools and equipment
- Work clothes and PPE
- Equipment maintenance
- Professional services
- Accountants fees
- HR support
- Marketing support
- Legal Compliance: Depending on your business, there may be costs incurred to remain compliant – whether that’s in updated training courses for employees, equipment maintenance and testing or trading licenses etc.
- Marketing and Promotion
- Flyer design and print
- Facebook advertising
- Website or website maintenance
Don’t worry if it looks like a long list at this stage. It is essential to include as much as you can. Don’t be tempted to disregard something to try and cut costs on paper. The reason behind this is to know, as close to the penny as possible, what will be going out.
2. Categorise
Once you have a list of costs, decide which costs remain constant and which will change. What will you need more of, for example, if your workload increases?
Break your list of costs down into the following categories:
Fixed Costs
Expenses that will remain the same, regardless of the scale of project you’re working on or number of jobs being completed.
Examples might be office or factory space, van leasing and insurances, mobile phone contract etc.
Variable Costs
Expenses that change depending on the work you’re doing. Variable costs tend to increase when you’re busy and reduce when your production dips.
Examples include costs of raw materials, electricity bills, petrol etc.
Semi-Variable Costs
Costs that include both fixed and variable elements.
A common example of semi-variable costs is overtime wages. While the wages a company pays its regular staff is considered fixed cost, any payment for overtime work is considered a variable cost, as it increases and decreases with the company’s level of production.
3. Calculate
Once you have your neatly categorised lists of costs, try adding values where you can. Use the last year as a benchmark.
How much did you spend each month, each quarter or each year on these items.
4. Sift and Sort
Now you know:
What you’ve spent money on in your business and how much you spent on each item.
This is a great place to be! Now think about:
- Whether every cost is necessary
- does every cost add value to your business in some way?
- Whether any can be reduced
- could you get better rates for any of the services, such as your phone contract or utilities?
- Whether any can be altered to make things easier for you and your cash flow
- could you spread the cost of expensive items or services, so you don’t suffer a big hit in one month?
5. Make profit!
Now you’ve got a clear idea of how much you need to cover costs, it’s easier to work out how you can make more profit!
There are lots of things to consider here, which is worthy of a whole other post. But here’s a few pointers to start you thinking.
- Are you pricing your jobs correctly, taking into account not only the labour and material costs, but other overheads of running your business?
- Do you need more work to fill your time and make more money?
- If you haven’t got time to take on more work, why is that? Do you need to outsource more services to free up your time, or think about taking on more staff?
- Are you chasing the right work? Should you be focusing on getting more of the higher value jobs rather than lots of smaller jobs?
By calculating the cost of running your business, you’ve taken the first major step to making your business more successful.
At Get Smart Accountants we work with our clients to drive growth and help them achieve their dreams.
If you’d like some advice or support to get your business moving in the right direction, then we’d love to hear from you.
Call Emma or Paul on 01902 212937
#growthriveprosper
