Profit & Expense Control
Profit is a cost! Yes Profit is the Cost of Being and Staying in business. Looked at a different way, Profit, is the “risk premium” that covers the costs of staying in business (replacement, obsolescence, market risk, and uncertainty). Profit provides the “costs of being in business” and “costs of staying in business”. Therefore the task of a business is to provide adequately for these “costs of staying in business” by earning an adequate profit.
If the business is not satisfying sufficient profits to cover the cost required to stay in business or providing enough capital for future growth, the future of the business is threatened and may be forced into either bankruptcy or operating in a “lingering death” mode. Most small Businesses traditional operate under a “residual” profit model, which only exposes profits after the fact. It is “the residual of what is left over, when all costs and expenses have been paid. Called “The Rear View Mirror” system it prohibits the business owner to drive the business forward.
Profit & Expense Control employs the concept of Predetermined Profits, is forward looking; is a finite number to satisfy the cost of “being and staying in business”. Predetermined Profit is like other fixed costs such as, rent, depreciation, interest, owner salary, insurance, etc. Therefore, Predetermined Profit is a prime number in Break-even calculations, pricing, etc.
There are really two types of profits “Predetermined and Penetrated”. “Predetermined Profit” provides sufficient money to recapitalize and to fund current and future growth. It provides sufficient money for owner’s income, and an adequate return on owner’s equity. The number one reason for business failure is “cashing out”, which means that you cannot raise sufficient capital (cash) to cover your short-term obligations. To avoid this “death sentence”, your balance sheet (return on equity) should reflect your strength in securing short term funding. This is not just a small business phenomenon. Consider that the fourth largest US business cashed out in 2001 under this exact condition. (Enron).
After achieving the initial breakeven, Penetrated Profit or the second tier of profit is earned. Its definition is “marginal contribution beyond break even after achieving predetermined profit”. At this level of profits, money can be allocated to incentive plans/bonus’, and to discounting programs to drive increased sales and market penetration.
In the operation of a typical business, the very last item to appear on the operating statement is net profit. It is the amount of money left over after all other costs and expenses have been paid. Like in a screening process, revenues of the company are thrown into the hopper and whatever is left on the screen after the shakedown belongs to the company. The profit is purely a matter of residual retention. This is a mighty loose way of running a business for profit. Except for churches or other nontaxable, nonprofit institutions, the sole objective of any business is to make profit.
Profit & Expense Control plans profit as the first item of expense and establish controls for expenses so that operations and sales will provide planned profit. McFarlin Tax and Profit Solutions have the expertise to devise and install a comprehensive and easily administered system for controlling income and expense to achieve predetermined profit.
This is achieved at all sales levels, whether they are trending upwards or downwards. The installation of a Profit & Expense Control plan will spell the difference between continuous and greater profit achievement and the oblivion of failure or greater reduced profit. Operating statements tell owners what it cost to do business, but it cannot tell them what it should have cost.
The answers to all of these problems, and more, are a function of Profit & Expense Controls. McFarlin Tax & Profit Solutions has implemented numerous plans into businesses of all kinds to assist them with profit and growth improvements. Most owners feel they should have more profit. The first step in the process is to conduct a Business Assessment, which is a study of the operating conditions of each of the functions of the business. This will pinpoint areas of profit and growth improvements. A detailed summary of the findings is presented to you both verbally and in writing. From these discussions, we will formulate and establish the plan of action to achieve the profit objectives.
Please call or write for an in-depth discussion of what I can do for you and/or signing up for a FREE BUSINESS ASSESSNENT of your operations. Sales and luck alone will not perpetuate a business. Sufficient and Continuous Profit will realize perpetuity.
