Do The Math – If You Want To Stay In Business

Managing your small business successfully comes down to a combination of things. However, in the words of one of my favourite Small Business Mentors – Madame Marketing (Sharon Tieman), there are two critical factors you need to consider. You need to be good at Maths and you need to be good at Marketing.

If you’re not good a Maths, you’re more likely to go ‘broke’ quickly. If you’re not good at marketing, you’ll go ‘broke’ slowly.
In this article, I’m going to focus on why you need to be good at Maths…. the marketing will come later.

Why Maths? Simply, you need to understand your expenses and cashflow to be able to make an informed decision about the activities you undertake.

Do you know what it costs you on a yearly, quarterly, monthly, weekly and daily basis to run your business? If you don’t – how do you know if you are charging the right amount for your products or service or…. whether the money you are spending (or want to spend) is worth it?

How do you know how much you need to invoice each day, week or month to ensure that you not only cover your expenses but also make a profit? Do you know how long you have available in ‘cash reserves’ before things get really dire?

It is for these reasons you need to be good at Maths.

I’m not talking about sophisticated or complicated maths either… I’m talking about the basics – addition, subtraction, multiplication and division.

Let me share a few strategies with you, that have served me well in the past…

First, you need to know your expenses. Get a spreadsheet, or if you aren’t comfortable using the computer, get a piece of paper. Write out everything that it costs you to run your business, and not just the big things.

List everything you can think of. Start with annual expenses – these may include:

• Insurances
• Licences
• Hosting fees
• Registrations (Car, Business)
• Domain Names
• Maintenance / repair fees for websites, computers, cars etc

Regardless of when these expenses fall due, work out the total annual cost and then divide it by 52. This will give a Weekly amount.

Next, list your quarterly expenses – if you have any.

• Subscriptions
• Memberships
• Hosting
• Utility Charges (Gas, Electricity, Water, Phone, Internet etc)

Then, total all these and divide by 13. Now you have another weekly amount.

List your Monthly expenses… these probably include:

• Rent
• Wages and Employee Expenses
• Hosting Fees
• Membership and Subscriptions
• Utility Charges (Gas, Electricity, Water, Phone, Internet etc)
• Stationery and Office Supplies

Total your monthly expenses and divide by 4 – yes, I know that the correct number is a little more, but 4 gives a little bit of leeway in your calculations.

Then list your weekly expenses

• Beverages
• Fuel
• Car running costs

If you have daily expenses, calculate these on a weekly basis (5 or 7 days depending on how they fall).

Now you’ll notice I haven’t listed product costs, if you’re selling product or our own labor costs. I’ll come to these.

Now, add all your weekly expenses together. The resulting number is what you must make each week, before you pay yourself, pay for stock or declare a profit.

See – simple maths. Tedious, absolutely – but invaluable. You know the Mastercard ads… time taken to determine cost of running, PRICELESS.

Reducing all of your expenses to a single weekly number allows you to determine whether your business is on track each week.

I do this. I know what I need to be invoicing on a weekly basis to break even. After I’ve completed my weekly invoicing, which is for the previous week, I know whether I’m on target, above target or behind.

The next thing, is to consider your income position. If you’re on or above target – well done, keep up the good work. If your behind, you need to review upcoming work and decide whether you will make up the shortfall or not.

By reviewing your cash position each week, you can then review your marketing and sales plan to better suit your needs.

Now, I hear many people saying that they don’t invoice on a weekly basis and they only review their accounts on a monthly basis. I feel, it is imperative for you to be keeping track of your income and expenses on a weekly basis — even if this is just a simple spreadsheet or notebook where you record the high level view of what your doing.

My husband is an electrician and runs a business with my Father. Each day, they review the work completed and the amount to be invoiced and decide whether they are on track for the week. This has proved invaluable in helping them schedule work so that they are more productive and profitable.

So… the success of your business is in the Maths… get that right and you are on a great track to being successful.

Related posts:

1. Business Planning For 2010