UNDERSTANDING THE MATH BEHIND RUNNING A BUSINESS! By Tom Donato
It’s almost that time of the year when we get to know the truth about how well our businesses performed throughout the financial year. Unfortunately for some businesses the hard truth hits home and that there was actually little to no profit and in too many instances was actually a loss. The last couple of years have been a roller coaster of emotions and financial tug of war with so many lockdowns and restrictions. For most there was financial assistance from governments, which saved many small businesses from going under and for some there was turmoil and uncertainty. It’s time to put the pandemic behind us now and concentrate on the future. First things first! The business finances! When you run a business the most important aspect is understanding the basic equation that all business owners need to know. That is that all money coming into the business is the Turnover. All money paid out in order for the business to run I like to call the Handover (expenses) and any money that’s left I like to call the Leftover (profit).
owners lose track or are not aware of some of the costs associated with running a business. They may be somewhat aware, but they fail to constantly keep their finger on the pulse. Often, they find themselves not having enough funds to pay the GST or the Superannuation or the PAYG tax or the insurance bill they forgot about in April. The key is to budget. I often speak to businesspeople that are very good at budgeting their turnover but sometimes don’t take the time to budget their expenses. It is critical that time to compile an expenditure budget is allocated at the beginning of a financial year in order to track and ensure that there are profits left over in the business. The most common question is how will I know how much I am going to spend next year?
So, the turnover minus the handover equals the leftover.
The answer is usually easier than most people think.
That’s a very simple way to remember that in order to have profit a business needs to turnover more than it hands over.
It’s easy to look at the previous year’s expenditure and just add a percentage increase to all the categories. For example, most leases stipulate what the rent will be for each term, you can expect wage rises within the year, insurance will usually go up as will the cost of
What’s not so simple about that equation is keeping track of spending. Many business 104
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goods a business needs to service their clients. If a business owner understands a profit and loss statement then an expenditure budget is just that, with an increase. An expenditure budget should look exactly like your P/L only it hasn’t happened yet. It should also include the expected turnover and the expected profit. Why is this so important? The answer is it will help businesses budget for their turnover and help you assess and adjust pricing to make sure that what’s coming into the business is greater than what’s going out. It will also help you understand that if the turnover declines, then there are certain costs that can be cut such as a nonperforming team member, or look at product wastage or can you afford that photo shoot? Having a benchmark of cost vs percentage of turnover also makes it easy to calculate what you can afford in your expenditure budget. For example, if you expect your turnover to be $1m and you budget for a 40% wage cost then you know that you can only spend $400K in wages. If you budget for 12% product cost, then
