business

How to determine if a business is profitable

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You have a passion, and you’d like to make it your profession. No matter how enthusiastic you are about your small business, though, it won’t be successful unless you have a plan in place for how you’re going to start and run it. It doesn’t matter how long or detailed your plan is, as long as it covers a few essential points. Most successful small businesses will need to have a break-even analysis, a profit-loss forecast and a cash-flow analysis. A business plan is essential because it allows you to experiment with the strategy for your business on paper, before you start playing for keeps. Profit is, after all, the ultimate goal of any successful small business.

This is known as a break-even analysis. Many small business owners cover their start-up costs entirely through loans, with the expectation that they will begin paying back the loans with the profits from their new business. New businesses can take months or years to generate a profit, however, and loan payments can really become a millstone around the neck of a fledgling operation. If you can save up as much of the start-up capital yourself before you open your doors, you will help ensure that loans won’t sink your new business.

Remember, also, that there’s an outside chance that a lender will call a loan or add unfavorable terms if your business isn’t as successful as you initially planned. If you provide as much of the start-up money as possible, it will lessen the odds of a nasty surprise like this hindering your business. Most small businesses are sole proprietorships or partnerships. While these types of businesses are nice and easy to form, they also expose their owners to liability for business debts and judgments. Creditors and judgment holders can come after the owners’ personal assets, like savings accounts and homes, once the business’ money is depleted. Everyone wants their small business to be successful, with multiple locations, lots of employees and loads of revenue, but you have to learn to walk before you can run.

Don’t spread yourself too thin or take on too many expenses at the beginning, especially if your income might take a while to catch up to your ambitions. By starting small, you ensure that you can survive the inevitable hiccups associated with running a small business. Those entrepreneurs who begin with modest operations can recover and learn from their mistakes without taking on a lot of debt. Starting small will help your small business grow into a successful enterprise. While, it’s nice to do business with a handshake, there’s no substitute for a well-written contract. Indeed, many contracts are not valid unless they are in written form.

While contracts can be valid when orally made, they are much harder to prove and enforce. Make sure you get all agreements in writing — it will save you headaches down the line, and could even save your business. There are many ways to gain a competitive edge over other businesses in your industry: you could have a better product, a more efficient manufacturing or distribution process, a more convenient location, better customer service, or a better understanding of the changing marketplace. The best way to hold onto your competitive edge is to protect your trade secrets. A trade secret is that information that isn’t known to others that gives you a competitive advantage in the market. There are many kinds of trade secrets, and trade secrets receive legal protection as long as their owners take steps to keep them secret.

Another way to hold onto your competitive edge is to stay proactive. If you know that your business is going to face challenges or encroachment by a competitor, don’t wait to react — plan ahead and you’ll stay ahead. Don’t just hire the first person to come along with the basic qualifications you need. Look for someone with motivation, creativity and the right kind of personality to make it in your industry and fit in with your business. Lots of businesses try to save money by hiring people as independent contractors rather than full-time employees. The IRS will impose large penalties on businesses that do not withhold and pay taxes for workers that it considers full-time employees rather than independent contractors.

Also be sure to create an “at-will” relationship with your employees. Employers can terminate at-will employees for any reason, which is essential if an employee isn’t working out. There are many ways to make it clear that the employment relationship is at-will, including in employee handbooks and through offer letters. It should go without saying, but it’s important to pay what you owe — especially when dealing with the IRS. The IRS can impose harsh penalties and even come after a business owner’s personal assets if the owner doesn’t remit payroll taxes on time.

It’s also important to pay your regular debts in a timely fashion. If you get a reputation for stalling on a debt, you could find it difficult to form business relationships in the future. It should go without saying that entrepreneurs wear many hats — but “attorney” shouldn’t be one of them. While you will have to get acquainted with the laws and regulations that will impact your business, sometimes it’s important to leave the details to the professionals. Next Steps Contact a qualified business attorney to help you navigate the process of starting a business.