18 February 2007

Exactly how much does your business cost to run?

Do you know exactly (and I do mean exactly) how much it costs to run your business? If you don’t, relax – most business owners don’t. Most have a rough idea but not an exact amount. Well I can personally attest that this is one area of any business that needs to be looked at long and hard. If you don’t know how much it costs you to open the doors every month you can never really know how much money you need to bring in to cover costs. And if you don’t know this, you can get yourself into some serious trouble.

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I ran a business for 12 months and I had worked out that it cost $20,000 every month to operate. For some reason I never seemed to be getting ahead – there was never enough money to cover the bills. After 12 months I had to sit down and figure out where I was going wrong. I recalculated all of my monthly expenses, particularly the odd ball amounts that are not as memorable as perhaps the rent or wages and to my shock and horror I realised that I was $10,000 per month wrong. It was actually costing me $30,000 to run my business every month – and I was making enough to cover the $20,000 figure I had in my head, but not enough to cover the $30,000 figure that was reality. If I hadn’t picked this up it was only a matter of time until I went broke.

Now I ask just about all of my clients if they know what it costs them to run their business and very few can accurately answer the question – often stating that there are too many variables to know until after the month has passed but any accountant will be able to advise you on how to allow for the variables. Even more importantly, always over estimate costs rather than under estimate. This way, you can be pleasantly surprised when the bills come in rather than terrifyingly shocked.

Figure out the exact cost of doing business on a monthly basis and you can then work out what it costs to run the business every week, every day and every hour. It is often a little scary to do this but it is also very liberating as it will give you a very firm handle on exactly how much money you need to make to survive.

WHAT CAN YOU DO TODAY? Work out exactly how much it costs you to open the doors of your business every month. If there are figures that you have to estimate go on historical data and over estimate expenses rather than under estimate.

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