Managing your expenses and your profits

Managing your expenses and your profits

By Leon Presser, author of What it takes to be an Entrepreneur As you create and grow a business you must have a continual and clear handle on where you are making money and where you are loosing money. In addition, you must monitor how you are performing vs. your business plan.

This is the only way you can navigate towards your (hopefully well delineated) goals. Below I describe a simple technique that will be of much help.

Profits and Cost Centers As your company grows, define profit centers and cost centers. What this means is that you designate groups of employees that you can explicitly associate with profits and expenses. You refer to a group of employees that produces direct revenues as a profit center. You refer to a group of employees that produces no revenues as a cost center. Here are some examples of profit and cost centers: Your sales organization and the different sales offices are profit centers.

Your accounting group is solely a cost center.

In our company we had one person dedicated to expediting collections; she was a profit center.

This allows you to create reports showing how much each center costs to run and how much profit they contribute to the company over a given time period. For each profit/cost center, you can track actual profits/costs vs. projected profits/costs allocated in your business plan.

With properly defined profit/cost centers, you can also specify target performances for different groups and offer incentives such as bonuses to each group that meets or exceeds its objectives.

If you are a one-person start-up company you may question this discussion since you would be the sum total of all your profit and cost centers. You would be wearing multiple hats. It would indeed be helpful to you to think of each hat as a profit/cost center and to analyze how you are performing.

Of course, I must tell you that I do cover this topic and related issues in more detail in the book. I do want you to read the book. I also encourage you to go to the book’s website (www.whatittakestobeanentrepreneur.com) and subscribe so that you will be notified each time a new post occurs.