It’s been said that 1 out of every two businesses fail by their 5th year. That means 50% of every new business that is started fails within 5 years. I don’t know about you, but 5 years is a long time that goes by so quickly. I can’t imagine putting in so much time, money, and effort only to come out of the 5th year (if you make it that long) with nothing to show for it but experience and lessons learned. I have put together a list of 4 things any new business owner should know before launching their website or applying for a DBA. This post has got to be the number one reason why we created Prophit. Read on below for the 4 things you need to know before starting your business. Our Prophit sheets can help you with all of these steps to set you and your business up for success way beyond 5 years.
1: Know Your Net Profit Margins
Net profit is what determines your business’s profitability. Here's a quick way to understand it:
Revenue (money earned from a sale) – Expenses (cost of materials/ingredients) = Net Profit
Your net profit is yours to use however you’d like; however, most successful businesses use this money to reinvest it back into their businesses to scale it. This may in fact be the most important tip you should know before doing anything else. If you are not making much profit, you are really just funding an expensive hobby. Make sure you have this one understood and in good standing before doing anything else.
2: Get Your Business Finances in Order from the Beginning
No one likes to hear this, especially when you are starting a new business. We think, starting a business should be something fun and exciting and it is, but that feeling will only last you so long. Besides not having enough revenue to cover expenses, I believe another reason businesses don’t last is a result of the inability to stay on top of their business finances. With Prophit, we keep everything organized for you so you don’t need to worry about that aspect of your business and can put your focus back into what you really want to pursue.
3: Review Operating Expenses
There may be days where it feels like your business is thriving. You’ve got sales coming in every day and you’re so busy you can’t even respond to a text. Don’t be fooled by these kinds of work days. Your gross sales may be increasing, but there's a chance you aren't even making a profit. There is a very simple way to prevent this from happening. Usually in the early stages of a new business, expenses grow as the business grows. This means you should be checking to make sure your revenue is still covering your expenses plus the margin of profit on top of that. Prophit will guide you through each expense along the way to setting margins for a healthy return.
You must check to make sure your expenses are not exceeding your revenue. However, there will be moments where you need to make a big purchase for a machine or equipment that could potentially make your product flow faster and more efficient. Investments like these may look scary on a month's profit and loss sheet, but as time goes on that piece of equipment will likely pay for itself and provide you with continuous returns. Generally, you want to make sure your expenses are low in order to put more money into your pocket.
4: Anticipate the Future
It is a good idea to list some potential sudden expenses that may come up like a website renewal, or a business permit you’ll have to renew annually or every couple of years. Keep these expenses in mind and plan for them. If you don't work with a tax professional, make sure to put money aside for taxes and other "once-in-a-while" expenses so you don’t fall behind or forget to account for them. Once you set up a system to remember these types of payments, it should be easier to manage your business expenses.