Many entrepreneurs get super excited when they see sales creeping upward. One can understand why – sales appear to be the scorecard. Unfortunately, what’s commonly frustrating for entities is that just because they’re selling well does not mean they’re financially healthy. Many industries bring in a lot of money, yet burn through it just as quickly and find themselves in dire straits.
The bottom line is that it’s only as good as those other variables – tracking sales revenue is great, but businesses that make out like bandits and those who constantly feel cash-poor are separated by tracking more than just sales revenue. They’re aware of the entire financial picture, including all the nuances and numbers that don’t always show up in a report.
Where the Money Goes
Expenses are not tracked as one huge lump sum. Instead, expenses break down into categories – and more importantly – certain categories matter much more than others when it comes to sustainable business operations.
First up is the cost of goods sold. This relates directly to what it takes to produce the product or service being sold. If a restaurant sells meals, food and wages of kitchen staff are considered COGS. If a consulting business is thriving, billable hours constitute COGS. It’s direct-to-consumer work. It gets billed in proportion to sales, meaning consistent monitoring is required.
Next up is overhead, which sustains operations during busy and slow times alike. Rent, insurance, subscriptions, salaries (non-billable) all contribute to overhead expenses, which remain relatively stable on a month-to-month basis. However, it’s problematic when overhead creeps higher and higher without anyone caring. A $50/month subscription becomes five subscriptions, and suddenly, an additional few hundred dollars slip through the cracks monthly.
Why Cash Flow Is Different Than Profit
A business can make a profit but still find itself with no cash to pay its bills. Surprisingly, this happens more than one might think. For those in industries with physical products or operating under invoicing arrangements with clients, it’s all that much more likely to occur.
Cash flow relates to cash coming in and out as opposed to cash billed (and expected). For example, if a company invoices a client in January but doesn’t receive payment until March, that cash sale does not help pay expenses in February. However, accounts payable relationships want money now rather than later.
Thriving businesses monitor cash positions weekly – and sometimes daily – they know exactly how much is in the bank at any given moment, what’s coming in over the next few weeks and what’s due for payment. Cash burn is one issue that happens sneakily fast.
Patterns In Spending That Emerge
Every business has specific spending patterns – but they can’t be determined until tracked. Certain months hit harder than others – an annual insurance payment may be due in March or temp workers may need to be brought on during busy seasons.
Frequency matters – how often does a business need to order inventory? When do software renewals come due? Are there quarterly tax payments? These patterns emerge once someone tracks them, but when everything’s in someone’s head or scattered among receipts, it’s just too difficult.
This is especially true for companies with multiple people purchasing things for the organization. Employee spending can become disbursed across different cards, different vendors, different categorizations – it’s overwhelming without something that helps accommodate this.
Yet organizations seeking visibility into patterns without drowning in receipts often choose the best expense tracking software that can automatically categorize transactions and help people see patterns emerging.
Ultimately, the right tracking system shows which departments or projects are costing more than originally anticipated, whether marketing dollars line up across the board, and potential duplicate charges for services not being used.
What Debt Obligations Cost
Businesses that operate on lines of credit or loans need to be aware of more than just their monthly payments. The cumulative debt load will impact borrowing capacity in the future; interest rates fluctuate; payment structure may result in balloon payments three years in.
Credit card statements require scrutiny; the interest adds up when a company uses their card for certain payments. If a company charges $5,000 on a credit card monthly yet pays it off monthly, that’s different than one with a rolling balance of $15,000 every month. The costs might be equivalent from a reporting perspective – but one business pays an extra exorbitant cost for having this convenience.
Lease obligations apply here as well – leases for equipment leases cars or any property – commitments allocate future cash to certain uses. Tracking should ensure that too much cash isn’t being expended for potential opportunity costs down the line.
Time That Doesn’t Yield Revenue
Not all costs equate to money going out from the bank account; time represents massive expenditures that many companies fail to track – if they ever track them at all.
Billable vs non-billable hours show where service businesses stand – or should stand – in terms of profitability. If a consultant works 60 hours per week but only 30 of those hours get billed out to clients, those 30 hours remain an expense without generating revenue. The same goes with payroll opportunity costs.
Employee productivity works twofold; how many hours did employees actually work? How many hours did they spend in meetings? Administrative tasks? Time spent on projects or client-facing initiatives? Businesses failing to track this end up discovering they’re paying employees to do things that yield no value.
Timelines also play a role – for projects quoted for two weeks but completed in four weeks eat into margins quickly – even if the payment remains unchanged. Materials sit in limbo and equipment becomes tied up while missed opportunities delay others.
Inventory Sitting on the Shelves
For product-based businesses, inventory equates to cash stashed away – tied up in tangible items. If too much inventory sits on shelves and not enough gets moved out the door, money gets wasted; if not enough inventory sits on shelves, missed opportunities occur because consumers may become discouraged.
Turnover rates help determine how inventory moves quickly or slowly; if an item moves slowly, it creates an issue – potential obsolescence – but if it moves quickly, a business may find themselves ordering frequently and incurring shipping costs and congestion.
Shrinkage is expensive – from theft or damage – or materials expiring constitutes money lost without ever yielding any operational expenses. Tracking helps give an indication that problems exist when it comes storing and handling inventories (or security).
Customer Acquisition Costs
Businesses must understand their costs associated with acquiring customers – and this varies wildly by industry (and approach). Marketing expenses involved at any point generate acquired clients…transactional discounts…they’re all part of what it costs to gain a customer.
But what matters even more is customer lifetime value compared to acquisition cost; if it costs $500 to land a customer who brings in $300 worth of total expenditure – it’s losing proposition. But if that customer sticks around over the years and spends $5,000 – the math makes perfect sense.
Retention costs go hand in hand; there exists a cost associated with keeping existing customers over finding new ones – but retention efforts aren’t free. Customer support efforts, loyalty programs and calls/communications require resources – and businesses need to track whether retention gains/best practices are successful/cost-effective.
Why This Matters
None of this tracking exists merely for fun; it’s all part of decision-making power.
When businesses have an awareness of what true costs are, they allow themselves the opportunity to explore pricing; when they know what’s coming in vs what’s going out vs what can be planned for – businesses can weather storms or grow during opportunity.
Understanding spending patterns reveal waste or inefficiencies while tracking elements together expose which pieces contribute revenue versus appearing busy.
The businesses that operate beyond sales revenue are ultimately able to make better choices about where to expend additional funds which areas to cut and when to say no to opportunities that look appealing – but ultimately could sap cash and resources real fast down the road.
They’re not necessarily working with bigger budgets – they’re working with knowledge of what’s going on within theirs!
