Some businesses always have cash available. They can absorb unexpected expenses without alarm. They invest in new opportunities when they arise. Their owners get decent paychecks, too. Other businesses that make the same amount of money always struggle, too. They scrape by from invoice to invoice and it never gets easier.
The difference lies almost exclusively in how they spend and save money. Not how much they are bringing in but what they’re doing with it once they get it.
They Know Their Numbers
If you were to walk into a business and ask a profitable business owner how much their profit margin is, how much money they’d need to spend to get through the month, their average cost of acquiring a customer, they’ll be able to tell you. Not because they’ve memorized it but because they look at it often enough that it’s fresh in their heads.
Profitable businesses consistently look at their key metrics on a weekly or daily basis. They know where they stand at any given moment which means they aren’t playing a guessing game hoping for the best.
They Keep Business Money Separate
This one should go without saying but so many business owners blur the line, paying personal expenses with their business account and putting personal expenses on their business credit card.
The profitable owner keeps it separate all the time. It might be a pain at first but when money is coming from business money for business purposes—and when the owner wants to pay themselves they do so through payroll, draw, etc—it becomes clear as day how the business is really doing.
They Reinvest Money Where It Makes Sense
It’s one thing for a profitable business to sit on a pile of cash and it’s another for them to reinvest it where there are systems which generate revenue and save costs. Whether it’s updating systems, hiring new people, spending more on customer acquisition, it makes sense when the goal is make money instead of keeping it all for themselves.
Often this means spending money on marketing. Some businesses have success tapping into a push ads network where people receive information directly on their mobile devices but everyone has a different avenue to explore. The key is devoting a budget to something which tangibly gets people in the door and tracking whether spending that money is worth it.
They Set Money Aside for Taxes
When it comes to tax season many business owners are surprised by what they owe come April. It’s much more than they expected and now scrambling for cash is required.
Profitable businesses set aside money every month—they factor in what they want to be able to pay towards taxes and take that money from every month’s revenue to create a savings plan. Thus, when tax season rolls around, they already have money waiting for them.
They Control Spending Wisely
There’s a difference between being cheap and being frugal. Cheap businesses skimp out on things that matter while frugal people invest where it’s critical but cut costs elsewhere.
Profitable businesses regularly check in on their expenditures. They cancel subscriptions. They work with vendors for better deals but spend time investing in things with great returns such as purchase options which are good quality and advertisements that bring tangible new clients into their door.
They Build Cash Reserves During Good Times
It’s unfortunate but when things go wrong, businesses tend to curse themselves for not having cash reserves. Equipment fails, clients drop off the radar or the market shifts overnight—and if there aren’t any reserves there’s an emergency.
Profitable businesses create cushions during good times. They save a percentage of revenue every month to work up to at least 3-6 months worth of operating expenses in a cash reserve bank.
They Pay Themselves First
When profitably owners venture into the world of paying themselves, it’s either consistently or when there’s always been an option at the end of the line for them. They treat their own payments as an expense of the business without factoring what comes first out of the equation.
Struggling businesses pay everyone else first then accept what’s left over at the end of each month. Sometimes it’s nothing. Sometimes it’s a lot but it’s not fair to be put at the mercy of what’s left once everything else is taken care of without holding an owner’s salary or draw determined up front.
They Don’t Just Look at Revenue But Profit Margin
When revenue looks high, that’s exciting—it’s the big number you can brag about when people ask how business is going. But if it costs more than the revenue received then what does it matter?
Profitably businesses look at profit margin because a healthy profit margin is better than doing a million dollars worth of sales when it costs more than that to generate those sales appeal.
They Monitor Their Cash Flow
Business can be profitable but have no cash flow due to discrepancies about when goods go out versus when funds come back into play.
Profitable businesses manage cash flow actively—when they know a big expense is coming they accommodate sooner rather than later. Acknowledge cash conversion cycles can and should be kept as short as possible so there aren’t any discrepancies between cash coming in and out.
The Takeaway
There are plenty of small businesses are as successful and make as much revenue as other profitable small businesses. It’s not that those owners are smarter or work harder; it’s just that those owners do different things with their money and they do so consistently—track it, plan for taxes, create reserves, make data-driven, educated decisions instead of playing hope and guess games.
None of these tactics are overly complicated nor require advanced degrees in finance; they simply need discipline and consistent monitoring of whatever financial side exists within the business. What keeps businesses profitable tends not to be all that complicated; it just needs to get done.
