As we get to the end of the year, business owners everywhere are starting to think about how the current financial year played out. They’re thinking about taxes and profitability, and they’re gearing up for the new year ahead.
As I’ve been reviewing financial statements with our customers, what a lot of business owners want to know is… did I make money this year?
If business owners are keeping their books clean by not commingling business and personal funds, they probably have a fairly good intuition about whether or not their business is in the black. If they’ve been racking up a lot of credit card debt, that’s not a good sign.
But something that occurred to me is that although a business may be profitable on paper, the business owners still may not feel profitable, and they’re probably right. If the business isn’t paying its business owners or if it’s paying them less than what they’re worth, I would argue that the business may not yet be breaking even.
I’ve seen a lot of episodes of both Restaurant Impossible and Shark Tank, and I noticed that they both use one simple equation that helps them easily navigate the complexities in business finances at a very high level. The rule of thumb is that pricing should be sufficient to cover overhead, labor, and profit: a third, a third, a third.
So when I say your business may not be breaking even, even if you’ve got positive net income on your Profit and Loss Statement, this is what I’m talking about. If you’re making just enough to cover overhead, but you’re not paying yourself or others (labor) at market rates, and you’re not bringing home any profit at the end of the day, you probably still have some work ahead of you to get to where you want and need to be to *truly* be making money with your business.