Shop Talk: Practical answers for tough business questions
Question: We have been open two years and everything appears to be going well. Sales are increasing each month, as are the number of customers who come in each day. I was even hopeful I would be able to take a small salary this year until I got my store tax return back from our accountant. She says we lost money and need to increase our sales by another 10 percent just to cover our current costs, much less add a salary for me. I was really surprised, disappointed, and puzzled by how it all seems to be going well, but on paper we are losing money. I feel like giving up, but I love my store and this is my life-long dream. Can you help?
Answer: I know it doesn’t seem reasonable, but it is possible to have good cash flow, especially in the first few years in business, and still be operating at a loss. Sometimes in all the excitement of sales and new customers, we neglect looking at the actual numbers and creating financial reports such as a profit-and-loss report and a balance sheet. We have money in the bank and more sales coming in every day, so we must be doing okay, right? I’d love to say “Yes,” but the true answer is “Not always.”
Please know you are not alone. Many highly intelligent business owners miss this reality. Increasing sales can mask the hard fact that nothing is left on the bottom line. I have seen this cycle of increasing sales hiding an underlying loss go on for two or three years before the owner pays attention, and sometimes it is too late to correct. When sales begin to level off, which often occurs in the third or fourth year in business, and cash flow slows down, losses become apparent because you no longer have enough sales coming in to cover the deficit.
The good news is you already have a good accountant who is giving you advice on how much you need to increase sales to break even. I would go back to her and have her help you determine how much more in sales are required to cover current expenses and pay you a salary. This will give you a goal to shoot for, and in addition to looking for possible ways to cut expenses, you can brainstorm how to increase your daily sales, including creating a customer loyalty program, offering a monthly or weekly coupon to encourage frequent shopping, and investigating new avenues of advertising such as online and television.
Be sure you know where you stand financially on a monthly basis—not just at tax time! Find a way to review financial reports monthly (either provided by your accountant or using an in-house accounting program) to make sure you are not surprised by the state of your bottom line in the future.
First published in Vol. 28 No. 5 of Retailing Insight. © 2014 Continuity Publishing Inc. All rights reserved.