3 Business Costs to Scrutinize After a Crisis

After an unexpected financial shock to a business subsides, a cascade of new challenges impose unfamiliar burdens on the entrepreneur. Successful navigation of a return to normal demands distinctive planning skills.

Production Costs

Order fulfillment is perhaps the greatest issue confronting business restoration after a crisis setback. Before getting paid by customers, you have to endure the costs to deliver whatever you’re selling. Delivery to customers entails meeting production deadlines, which requires time and resources. Depending on your industry, you may have to plan for staffing, warehousing, shipping, and inventory expenditures.

Monitor an upward trend in sales on your business financial statements. Compare the growth between various equal periods, such as months or calendar quarters, to identify if the rate of increase is escalating. When this pattern is discovered, action is necessary to plan for additional resources. You’ll need third parties whose services can be enlisted for aiding production.

Making early connections with key outside resource providers is crucial for success. You need to engage in a vetting process by conducting due diligence evaluation of each potential source for staff, equipment, shipping, software, supplies, and inventory. This is not a cost-cutting exercise. Rather, you’re engaging in a plan for cost expansion. But you must assure that the new expenditures result in efficiency.

If you’ve built relationships with the right third parties, your production costs should remain consistent as a percentage of sales. This means keeping close watch on a steady gross profit margin. That’s how you’ll know that increasing production costs are not outstripping sales growth.

Overhead Expenses

The higher profits associated with returning to conventional scale are a consequence of rising net profit margin. That’s because your general overhead costs, unlike production costs, don’t rise at the same rate as your sales increase. Nevertheless, some general administrative expenses are likely to escalate.

Customer service is the most common structural implication of restoring sales. New customers need attention. But you certainly cannot afford to neglect old customers. As the business founder, you will likely be tasked with more customer contact as your operation grows. This means preparing to relinquish many of the things you previously did yourself. That’s when you should rely more on the services of outside experts for such matters as bookkeeping, advertising and promotion, and payroll preparation.

Taxes

The last, but most important, cost to scrutinize is tax compliance. This area must be your top priority in a growth environment. A business owner has sole responsibility for all tax obligations. But helpful assistance is available for the asking from your accountant. Be sure to obtain consultation about rising taxes as your business grows. Precise records are necessary to determine amounts and remittance dates for income tax, payroll taxes, and sales tax. Fortunately, automation is available that aids in tax calculations. But its proper use requires instruction. You must be knowledgeable about readying reports from these systems to spot mistakes and assure accuracy. So, this is yet another area where accounting professionals can teach you about optimal use of financial statements.

How to Calculate Return on Business Investment

One of the most practical discoveries by an entrepreneur is the profitability ratio, called return on investment or ROI. Unfortunately, the deployment of different methods for measuring ROI creates confusion. One of the common procedures for determining ROI is dividing profit by business assets. Another process is dividing by net assets, which is the equity capital of the enterprise. This ratio is usually called return on equity, or ROE.

Your business equity is assets minus liabilities. That is, take what the business has (such as cash and equipment) and subtract what the business owes (such as a loan or credit card debt). Say you have a basic service operation that has a computer that cost $600. But you charged the computer purchase on a company credit card and still owe $100. In addition, you keep $9,500 in a bank account to provide cash flow to pay expenses until customers pay you. The business assets are $10,100 ($9,500 plus $600), but the business equity is $10,000 ($9,500 plus $600 minus $100). When your business has a profit of $50,000, the ROI based on assets is 495%, and the ROE is 500%.

Obviously, capital-intensive businesses have much smaller ROI because they need more assets. These organizations may need $250,000 of assets to generate $50,000 of profit. That delivers a 20% ROI. Regardless of the type of enterprise you operate, tracking ROI or ROE uncovers your business trend. This is different than merely examining dollar profit. A rising profit can trigger lower ROI and ROE if you need much greater assets to attain that profit. This result signals potential trouble from insufficient resources.