"It's not hard to meet expenses. They're everywhere."
(In this post and subsequent posts, I am walking though 12 different examples of household budgeting mistakes and how they can all be corrected with accrual accounting techniques. Accrual accounting recognizes income when it is earned and expenses when they are incurred. An alternate definition is that accrual accounting records events that change your net worth.)
Your business appears to make good profits except when expenses spike.
Your small business seems to be doing well. You have plenty of steady work and you keep meticulous records of all your receipts. For most months, your customer payments (inflows) exceed your expenses for parts, rent, gasoline, telephone and other things (outflows) by $4,000 or $5,000. However, a few months out of each year are ruining things for you. Last month, it was the quarterly tax payment of $3,000. Five months ago, you had to buy a couple of new computers for $3,000, and replace some special construction tools for $5,000. Last year was mostly fine except for July, when you had to buy a new work van for $25,000. You feel that if only you could make every month what you make during the good months, you would be completely satisfied with your business.
If you've been reading this series, you may have already recognized that there is nothing new in the setup of this article. We've already covered the basic accrual issues and techniques, and the above symptom is suspiciously like the last article. The only real difference is that this article deals with unexpected business expenses, while the last one dealt with unexpected personal expenses.
So why even bother to break this out into a separate post? Mainly I've done that for emphasis. Unfortunately, over the years I've seen a number of small businesses that didn't make money, but yet the owner continued to insist that it was "making money most of the time". I don't bring any of this up to poke fun. Indeed, if you personally knew these people, I'm sure you would also find the situation very sad.
There are probably not a lot of small business owners out there that will come across this post, but if I can help even one person, this article will be a success. So if you are a struggling proprietor, do the words at the top of this article ring true? Do you feel that you are making money "most of the time", but a continual stream of unlucky "one-time expenses" are ruining your profitability?
I urge you to level with yourself. Most business owners have some familiarity with cyclical expenses, accrual techniques, and profit margins. But what's often lacking is realism. Sometimes entrepreneurs want things to work out so badly that they delude themselves into thinking things are working out when they are not.
Cash-based accounting can be one of your most delusional tools if you want to pretend things about your finances. Try evaluating your business differently. If you accrue your revenue and expenses, is your business really in the red? If so, take action! Decide to run your company differently or find a different line of business. Don't let years go by while you blame "unexpected costs" and "surprise expenses" for your business problems.
Recognition of a problem is the first step in solving it. If fact, you might even be halfway there...