Starting a Business? Don’t Forget About Profit

If you’re like most entrepreneurs, your dream of starting a business is fueled by your passion for a particular product or service. But while passion is undeniably powerful, it’s not enough to sustain your business for the long haul. You need to make a profit.

And as most entrepreneurs will tell you, focusing on profit isn’t nearly as sexy as focusing on passion.

Perhaps that explains this harsh reality: Many businesses fail during their first year, often due to a lack of planning. And of those that make it through year one, only half make it to the 5-year mark.

Taking time to think about the operations (i.e., profit-generating) side of your business — how it will pay its bills, what systems it will employ, etc. — can keep your dream from becoming a statistic.

Don’t limit your plan to the fun stuff
Once you have decided to start a business there are lots of decisions to make. Let’s say you are thinking about opening a restaurant. You will probably love choosing the menu, picking out the décor, and sampling wines to serve. But I’m guessing you won’t be quite as excited about pricing the menu, calculating your food, beverage and labor costs, and determining if you will make enough to break even.

Yep, I probably lost most of you with that last sentence! But here’s why you should pay close attention: a restaurant’s food, beverage and labor costs can eat up 50 to 70 percent of its profit. And you might need to sell seven thousand cupcakes a month to cover the overhead of the little cupcake shop you want to open.

Have you thought about how your costs will affect your bottom line?

Set your processes before you hit the ground running
In addition to a lack of planning, a lot of businesses find themselves in trouble because they failed to establish clear processes before opening their doors. They think their out-of-this-world product or service (and unbeatable location!) will be enough. But keep in mind: even businesses that are making sales — such as a restaurant that is always full of people — are forced to shut their doors because they can’t make ends meet. Having good processes can ensure your business is on top of cash flow-related issues — and many more that could arise.

So while you are working on your business plan, think about the fun stuff, but don’t forget about your accounting processes.

Accounting processes to consider:

• Organizational: What type of entity will you be? Do you have a partnership agreement?
• Financing: Will you try to secure financing from a bank or raise capital?
• Staffing: Will you hire an internal bookkeeper or use a third party? How many hours a week will you need them, and what will their qualifications be?
• Software: What point of sale (POS) software and accounting software will you use, and will they talk to each other?
• Gift cards: Will you sell them, will they be valid for internet sales, and will you be able to track their sales in your POS system?
• Financials: Will you prepare them on a monthly or 4-week period? Will you track inventory and labor costs each period or more frequently? Will the bank require any financial statements for loan purposes, or will they only be used internally?

After you have the above items figured it, get even more detailed: establish expectations for who will handle each aspect of the profit-and-loss statement and balance sheet.

Detailed accounting items to consider:
Who (owner, manager, bookkeeper or accountant) will be responsible for the following:

• Prepare annual budget
• File monthly sales and use tax returns
• Prepare financial statements
• Manage cash flow
• Calculate and record fixed assets and depreciation
• Record daily sales from POS system to accounting software
• Take deposits to the bank
• Communicate with vendors, enter and code invoices
• Human Resources: Prepare payroll, record payroll, educate the employees on requirements of tip reporting, handle workman’s comp audit
• Reconcile bank accounts, tie out loan balances, enter and reconcile credit card activity, tie out prepaid accounts, record petty cash activity
• Take inventory counts and record adjustments
• Track vendor information for preparation of 1099s, prepare 1099s annually

Ultimately, starting a business comes down to knowing yourself; you need to make sure the business you are starting is the right fit for you. The key is finding needs that you can and want to fill, and putting processes in place that will turn your passion into a profitable business.

So think about the items listed above, craft a plan, and take this quote from the late award-winning journalist Ed Bradley to heart:

“Be prepared, work hard, and hope for a little luck. Recognize that the harder you work and the better prepared you are, the more luck you might have.”

Good luck to you!

Chris Powers, CPA, is an AEM Business Partner who specializes in helping businesses and nonprofits grow. You can reach Chris at 507.304.6828 or at christine.powers@aemcpas.com.