Five Reasons You’re not Seeing a Year-End Profit
As you digest your year-end financials, what’s the big thing that sticks out to you the most? For so many business owners it’s the lack of profit at the end of the year.
Being profitable doesn’t mean that you, the business owner, are taking home a big paycheck each month. It doesn’t mean that you’re able to invest in the latest and greatest equipment. Of course, it could, but being profitable means a whole lot more than that.
There are a lot of reasons why you may not be seeing a year-end profit, but our goal is to make sure you are. So as you’re wondering what happened last year, we want you to consider some of the circumstances you have in your business today.
You have a large amount of debt
Debt can weigh heavily on anyone’s finances, but especially a growing business. If you’re still in a physical location, lease payments aren’t necessarily a bad thing if your in-person revenue stream is steady. But business credit card debt can cripple your business, particularly if the interest rate is high (and we suspect it is). Credit cards are not a good tool to keep afloat because the debt will eventually drown you.
What to do: Find ways to help you get ahead of your debt and stop incurring new debt. This means you’ll need to find ways to reduce expenses in other areas so you can increase your monthly debt payments. You may not see large profits right away but you’ll reduce what you’re spending on interest charges every month, and that will feel really good!
You’re spending it on year-end assets
The goal always seems to be reduce tax liability as much as possible, but that shouldn’t mean at the expense of your profits. Just because you have money in the bank at the end of the year doesn’t mean you need to spend it on a big purchase. Assets like gym equipment, new flooring, a new computer and the like should be planned for well in advance, not become a line item in your effort to reduce your taxes.
What to do: If your tax accountant suggests you make a year-end purchase to reduce your overall tax liability, ask yourself some questions first. Is this something you truly need right now? If not, there’s no reason to buy. Do you have money saved already for taxes? It’s better to have a plan for both purchases and taxes. With both of these in place, there’s no need to make a big year-end purchase.
You’re paying too much on recurring expenses
Every business has recurring expenses, like insurance, phone bills, cleaning fees and software systems. Often rates go up and you fail to notice because we missed the email notification or forgot to check to make sure you’re still using all the parts of that service. Just because your bill is currently one price, doesn’t mean it has to stay that way.
What to do: Every quarter, make a date with yourself to review your expenses. What services are you no longer using? Is there a way to reduce your rates due to good payment history, longevity of service and/or lowering a service plan? It never hurts to do your research and negotiate new rates to save some cash.
You’re not flexible and open to change
You know how hard 2020 hit local service businesses. Some gyms didn’t make it out of last year intact; those that did were flexible and open to change. The health and fitness businesses that survived are the ones that embraced doing things outside the box and found new ways to bring their services to their clients. Often they were able to shift because they had an emergency savings that gave them a little bit of peace of mind and a little bit of time to think through their next steps.
What to do: The obvious answer here is to build up an emergency savings account so you’re prepared in the future. Knowing this may not be possible for you right now, find ways to be innovative and flexible with your offerings. Relying on only one stream of revenue may not be possible moving forward so identify ways you can diversify.
Most importantly: you’re not taking your profit first
We teach clients how to take their Profit First, which is hands-down the best way to ensure you have a profitable business. It’s about allocating a percentage of your revenue to profit, before you deduct operating expenses, taxes and owner’s pay. Because if you’re not taking that profit first, chances are you won’t have anything left at the end of the month.
What to do: Find sustainable ways to increase profitability in your business. We’ve written about profitability numerous times, like how to increase profits and why you need to implement profit first in your business.
But the easiest way to learn how to increase profits and see that year-end profit you so badly want is to book a call with us. We’ll assess your profitability and put you on the right path to a successful 2021.