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“If you don’t know how much money you make, how can you possibly be calling the government tomorrow with a plan on how you are going to pay them?”
I received a call this week from an entrepreneur that was 24 hours away from having to call the government and give them a plan for how the business was going to catch up on missed payroll and tax remittances. This is a very frequent conversation I have on a weekly basis with entrepreneurs that find themselves in a tough spot. It is very easy to end up backwards with the government and other creditors but your ability to understand how your business actually makes money can be the difference between your business surviving, thriving or dying.
How does your business actually make money?
It seems like a simple question but many entrepreneurs struggle to understand how their business actually makes money. If you don’t know why your business generates revenue and profit then you are going to have a hard time figuring out how to solve your financial problems. Does your business earn a profit margin on the use of equipment by customers or does it earn profit margin on the time of employees and other staff? For example, if you own equipment and charge $300 per hour for the use of it, then your business makes money by making sure it costs less than $300 to provide the equipment to customers. If you charge an average of $300 per hour for providing professional services, then your business makes money by making sure it costs less than $300 per hour to provide those services to clients. You need to understand what the specific variables are in your business that if used properly could generate the results you need. If you are not getting the results your business needs then chances are good that you don’t understand how your business makes money.
I know how my business makes money!
Do you really? Do you know what your gross and net profit margins are? Do you know why customers or clients choose your business from a math perspective over the competition? Do you know what the value of your product or service is? Do you know what it would take to 100X your results? These are not simple questions to answer and many times they go unanswered. A business will move along until an entrepreneur discovers that they have overlooked aspects of their business or did not factor in variables (like payroll taxes) that should have been considered…and that’s how a business ends up having problems.
Not every business can work out of its problems. If you spend some time figuring out how your business makes money and then work backwards to see what would be required to pay off your liabilities, you might find that the work isn’t worth the reward. You might find out that your business has never actually made money. In that case you might be better off selling some assets or talking to a bankruptcy trustee. In my experience however, most businesses can work out of their problems and are be better off having done so. It’s not easy and is usually dependent upon the determination and tenacity of the entrepreneur(s), but solving problems creatively is what being an entrepreneur is all about. Can your business do it? The answer probably sounds like – “Yes…but…”
- we need to increase revenue
- we need to decrease costs
- we need to re-sell to past customers
- we need to add value to new customers
- we need to leverage strategic relationships
- we need to make some internal changes
Once you have defined the “yes…but” then you need to get work. Anything is possible if you can ask yourself tough questions and then struggle through the answers. Many entrepreneurs end up in a corner having committed to a course of action without actually understanding what they were doing. Once in a corner, an entrepreneur will use the pressure to re-evaluate their position, take stock of what they have available to them and then pursue solutions that not only solve problems but set them up for future success.
A great resource for developing an understanding of why businesses are profitable (specifically) is to listen to podcasts or watch videos of venture capitalists and investors that fund business ideas. Some of the really great venture capitalists and investors are able to dissect a business model and get down into the deep reasoning behind why a product or service works. Spending time learning about other business models in other markets can provide you with concepts and ideas that may translate well into your business and help you solve your problems. By looking at your challenges from a different perspective you might learn how to improve your business model and understand how your business actually makes money.