Financing Your Business

Your ability to do accurate costing for your products and services, and then to set proper prices for what you sell, can make all the difference between profits and losses, success and failure.

The name of the game is "profit." Everything you do in your business, every number that you calculate and consider every point of focus and concentration must be aimed at generating profits of some kind.

Become a Numbers Person

Most entrepreneurs are not "numbers" people. They have little patience for the details of financial statements and accounting. In order for you to be successful, you must master the numbers in your business.

You can hire bookkeepers, accountants, and financial advisers to help you, but you can never abdicate the responsibility of fully understanding every penny and every dollar that comes in and out of your business.

Determining Your Costs

Often the person who makes the fewest mistakes in business is the one who succeeds the most. You don't have to be an entrepreneurial genius to be successful. You just have to master what you are doing.

One of the entrepreneurial successes is to offer a high margin product or service of some kind. It is to produce, acquire, sell, or distribute a product or service from which you earn high profits on the sale of each one. In this way, you have a substantial cushion built in to protect you from losses.

Direct Costs

These are the costs of good sold. If you make a product or buy it from a manufacturer or distributor for $5, including all costs of shipping, transportation, insurance, and delivery, and you sell the product for $10, your cost of goods sold is $5. T his is fairly easy to calculate.

Indirect Costs

These are the costs that are not attributed to all of the products or services that you sell, not any specific ones. Indirect costs can be costs of salaries, rent, telephones, utilities, marketing, advertising, shipping, delivery, and many others.

Fixed Costs

These are the costs that you incur each month whether or not you sell a single item or generate a single dollar of revenue. Your fixed costs include salaries for your permanent staff, rent, utilities, many operational costs, and the costs for outside services, plus your own personal income from the business.

Variable Costs

These are the costs that increase or decrease depending on your level of business activity. These costs are incurred only when a sale takes place. They can include costs of good sold, sales commissions, delivery costs, and other costs that can be attributed, directly or indirectly, to the cost of each product or service you sell.

Semi-Variable Costs

These are costs that are partially fixed and partially variable. They can include part-time labor when you are busier than normal, additional utility, telephone, and mailing costs, and additional costs for outside services.

Sunk Costs

These are expenses that you have incurred that are gone forever. They can never be recovered. They are like an unattached anchor thrown overboard that sinks to the bottom of the ocean and is irretrievable.

Action Exercise

Decide what constitutes a "sunk cost" and resolve today not to spend another dollar or minute trying to recoup it.

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