It’s the time of year when you’ll be thinking about how to minimise tax if you’ve had a good year and working that through the usual juggling of cash flow.
It’s also the time of year to be looking to the future, to be planning next year and setting in place financial goals and budgets for the upcoming financial year. What I’ve found working with clients delving into their profit, or lack thereof, and cash flow challenges is that there are three black holes where money can disappear without you realising it.
BLACK HOLE 1 – MONTHLY SUBSCRIPTIONS.
Monthly subscriptions are a way of life in today’s online world. Not so long ago, subscriptions meant payments you made to your industry association or publications and accounting systems were set up to lump them all into the one number. That worked quite well as there would be just a few subscriptions each year and combined they didn’t add up to a significant number.
Over the past three years alone I have subscribed to 41 different apps and systems, and I’m currently subscribed to 17. That sounds a lot, but each one is an integral part of my business. How do I know these numbers so easily? Well, each one is a separate account in my accounting system, and when I look at my profit and loss each month, I can see what I’m paying. At the same time, I think about whether I still use the service and whether I can cancel any, or even if there’s a less costly option that does the same thing.
BLACK HOLE 2 – ADVERTISING COSTS.
Advertising costs shouldn’t be a black hole, but too often I see money being spent on advertising and promotion with no known benefit. In accounting speak that’s return on investment (ROI), but in simple terms, it’s about knowing whether you’re getting any income from the advertising or promotion.
One of my clients was using Facebook ads extensively and whilst not being able to directly determine whether the sales were as a result of the ads given it was a new business and their only form of advertising they knew that their brand was getting known and could basically say that the ads were working well.
After some many months when the income had reached a plateau, they decided to eliminate the ads. Surprisingly or not, the income continued at the same level without skipping a beat and has continued to do so.
When advertising or doing promotions, it is imperative that you find some way to measure the results and not just in the number of clicks or the click-through rate, but rather in the sales you make.
BLACK HOLE 3 – INCORRECT PRICING OR BLOW OUT OF COSTS.
I wrote about the importance of gross profit and gross margin in previous Smallville articles, one for product-based businesses and the other for service-based businesses. The issue is when the business owner has worked out their pricing and has determined that their profit margin is, say, 20%, that’s great, but what is the reality? Are the costs kept within the budget or have they snuck up a bit? If there’s labour involved has the project been delivered within the budgeted time allocated or has the team taken longer to complete the tasks? Or has the cost of material increased whether by foreign exchange rate fluctuations or by the supplier simply increasing their prices?
Keeping track of the actual costs and comparing these to the budget means you can determine your costs more accurately for the next project or increase selling prices when the costs have increased and doing so you keep your pricing at the level it needs to be to give you the result you want.
In summary, when setting your goals and budgets for next financial year, make sure you implement systems within your accounting system that will give you the appropriate information you need to review your monthly subscriptions, to check in on the sales you’ve made from your advertising and promotion efforts and keep your pricing on track and your costs of delivery under control.