That opened the entrepreneur business. Developed a demanded product, conducted marketing research, found its target audience. Passed packing courses and made a cool website, hired cool sellers.
And less than three years later the company closed. That's the end of a fairy tale.
And this is not fiction, but statistics: 97% of small business companies are closed within three years. Most likely, the percentage would be much less if, in addition to sales, innovation, marketing and packaging, entrepreneurs paid more attention to finance. Therefore, we asked Illya Eremin, the editor-in-chief of the "Unspeakable Finance", to sort out the financial nuances of the business. His word!
Hello! In this article I will talk about the five disastrous mistakes of entrepreneurs that can cost them business.
Think sales growth will lead to net profit growth
To earn more, you need to sell more. At first glance, this is logical. According to this logic, entrepreneurs are pursuing an increase in revenue. Often this works, but often it also negatively affects the company - there is more work and profits are falling.
The increase in sales requires additional costs for hiring and salaries for new employees, expanding sales areas, increasing the advertising budget, and so on. In parallel with this, the average check is reduced, because in order to reach new customers it is necessary to reduce the price. As a result, revenue growth rate is lower than cost growth rate.
Take for example the hardware store. For a couple of years, the owner worked fine, with a net profit of 450,000 rubles. per month. It would seem that life was a success! But it became boring.
The owner decided to scale up the business in order to earn more. I found the money: I took a part from the company's reserves, a part in a bank. And he opened five more stores throughout the city.
None of the new stores fired the same way as the first - in some areas of the city the demand was lower, in some - the competition was more serious. But in general, scaling went well: the network came to the rescue of 10,000,000 rubles. per month.
But costs have grown even faster. And the average check dropped. As a result, the network earns 100,000 rubles. less than a separate store. The work is six times more.
Taking too much money out of business
You can take more out of business than the business has earned - everyone understands this. But few people correctly consider the net profit. Usually, entrepreneurs argue this way: what is in the accounts can be taken away. And then the money ends abruptly, the company falls into a cash gap, we have to urgently look for money.
Money in accounts is not always the company's profit. Not even that. Money in the accounts - it is almost never the company's profits. Profit is not about money at all, but about obligations.
Remember: money becomes profit only when the business has fulfilled its obligations.
Take for example a web studio. She entered into an agreement with the customer to create the site and received an advance payment. Prepayment is not revenue, it’s just the customer’s money, which he kindly provided to the web studio for use. Revenues this money become, only when the studio has handed over a site. Then you can use this money with a clear conscience.
But the owner of the web studio did not know. He was delighted with the large order and had a cheerful corporate event for his employees. There were quests, smoothies and music. A couple of days later the customer called: he said that his company had a hard cash gap, and since the studio had not yet begun work, the money needed to be returned.
Remember the main thing: you need to take profit on fulfilled obligations, and not on money in accounts.
Bury profits in accounts receivable and stocks
Business can be profitable on paper, but in reality it can be without money. So it turns out that the profit is not necessarily money. She has other aggregative states: accounts receivable, stocks in stock. Just like water, which can be in the form of liquid, ice and steam. The essence is the same, but the properties are different.
Accounts receivable are customer debts to you. For example, you have a printing house and you give customers a deferment of payment: you fulfill the order, and they pay it in 15 days. When you have handed over the order, then fix the revenue - because you have fulfilled your obligation. But you have not received the money for this order yet - they are in the receivables. There is revenue, but no money.
With stocks a similar story. Their purchase is not a company's expense, but simply a transfer of an asset from the “Money” state of aggregation to the “Stocks” state of aggregation. Problems arise when stocks become too much, and there is nothing for employees to pay.
This was the case with one cosmetics company: profits grew month after month, and the owner invested too much money in the replenishment of the warehouse, and therefore constantly fell into cash gaps. Although the company reportedly grew rich.
Do not plan spending and receipts
A typical story: the entrepreneur saw that there was a lot of money on the account, and decided to do a good thing - to invest it in the development of the company. Ordered a new site that will definitely increase conversion. The start is good. Continuation - not very.
A week later, it was time to pay salaries — there was enough money for that. Then the landlord came for the money - he also managed to pay. And when the accounting department notified that it was time to pay tax per quarter, there was no money in the accounts. Hello, cash gap! I had to take a loan so that the staff did not leave.
The owner would not have gotten into such a situation if he had led the payment calendar. This is a document that reflects all planned income and expenses. It helps to see in advance the cash gap and prevent it.
Delay the timing of projects
A profitable project can drag a company into a minus if its deadlines are delayed. Businesses have to incur more costs for their work: salaries, rent and so on. Revenue, however, remains the same.
We show by example. Two repair teams received identical orders with payment of 500,000 rubles.
The repair team "Cheetah" agreed in advance with the suppliers of materials, carefully planned the work, ordered trained masters for the project - and managed in two months.
Brigade "Turtle" decided: as we sink and burst. The craftsmen did not hurry anywhere (and why, the pay is paid), the suppliers first delayed the supply, and then brought the wrong materials. In the end, the same job took four months.
It would seem, well, spent "Turtle" more time - but the income is the same! Yes. And the profit is four times less.
Knowledge in the field of finance alone does not help a business to earn more. In the end, it's just the numbers in the tablets. But these figures provide information about the state of the business, its strengths and weaknesses. A competent entrepreneur sees in numbers the money he can earn and understands how to do it.
We hope this article will help you avoid rash financial decisions and save your business. And we, in turn, will bring customers from the network. Contact us!