In business it is often said that 'profit is either earned or saved'. In this column we will discuss the 'earned portion of profit' identified by way of income accounts. Income accounts that are set up to be measured and managed will enable you to test your marketing and sales strategies, help identify how to make your business profitable, or if it is already profitable, how to improve on its profitability.
Income accounts are accounts into which the sales your business makes are collected and closed at the end of an accounting period. The resulting income minus the expense incurred to generate the sale and the cost to produce the product or provide the service sold equals your net income or (loss). An Income account should reflect the source of the income in your horse business. Possible horse business income accounts include: Boarding, Training, Lessons, Breeding, Racing, Hauling, Showing, etc. Many horse businesses have multiple sources of income within one business. If you have multiple sources of income an income account needs be identified for each source so that each one can be measured and managed. Spending time and money on an income source that is not profitable is not good business. If you have an income source that isn't profitable you have two choices; figure out why it isn't profitable and make it profitable, or eliminate it and its associated cost and expense. You may be asking, what is the difference between cost and expense? That is a fair question since they both equal money being spent in your business. The cost of producing a product or providing a service is generally fixed and very difficult to eliminate, whereas expense is generally variable and if you stop selling a product or eliminate a service it goes away. I mention this because eliminating an unprofitable income source doesn't necessarily eliminate all the cost. For example, if you have a boarding, training and lessons business, eliminating anyone of the income sources doesn't make the barn cost go away unless you move to a smaller place - and then, that has other expenses that might take a long time to recover. You will only be able to know this if you have set up your income accounts to be measured so they can be managed.
When you only have one income account it is easy to identify the cost of producing a product or providing a service, and the expenses associated with that account. However, if you have multiple income accounts you need to be able to identify both the direct and indirect cost and expense associated with each account. You do this by identifying the direct cost and allocating the indirect cost. The cost of producing a product or providing a service is relatively easy to identify for a particular income account. For example, you can easily identify the direct cost and expense associated with boarding horses as opposed to training horses or providing riding lessons. If you are advertising to get more horses for your boarding operation that expense would be directly associated and charged against your boarding income. An indirect example would be bedding for all the horses in your barn. If you are purchasing bedding by the truck load it would be difficult and frankly, a waste of your valuable time to try and accurately assign the bedding expense to each horse. In this example you would allocate the expense on a percentage basis against the number of horses used in each segment of your business. If you have 50 horses in your barn and 15 are boarders, 30 are in training and the remaining 5 are used for lessons, your bedding expense would be allocated 30% against your boarding income, 60% against your training income and 10% against your lessons income. This example applies to all your cost and expense associated with each of your income accounts if you have multiple income sources.
If you are managing your business with a software system you need to make sure the software has the flexibility to assign and connect cost and expense to your income sources. Accounting systems generally do not have the flexibility in their chart of accounts to be able to do this. The equineGenie management system has this flexibility and enables you to measure and manage your income sources. The equineGenie management system allows you to define unique subaccounts within any account category and the artificial intelligence designed into the software logic makes the necessary connections so you can measure and manage your income sources.
Another topic that is usually avoided is looking at the profitability of a customer. Some customers have demands and requirement that make them unprofitable. Sometimes a customer is so disruptive that they drive away profitable customer. You can easily get caught up in the argument that it cost 10 times more to get a new customer than it cost to keep the one you have. This has been proven to be generally true, but if a customer is unprofitable you don't want them. My suggestion is to first try and fix the problem, but if you determine that a customer cannot be made profitable you need to get rid of them. It is OK to fire an unprofitable customer.
I cannot emphasize enough that in business it all starts with a sale. Make sure the income accounts you identify enable you to measure and manage your income sources. Businesses that are not profitable don't exist for very long.
In our next column we will discuss the 'saved portion of profit'. We will work on defining the accounts and subaccounts associated with your business expenses. Keeping track of your income can be beneficial even in a hobby business. In a hobby business you are allowed to write off your cost and expense against income. For example, the expense of showing a horse can be used to offset any show income. A good exercise would be to look at your income sources and try and identify the cost and expense incurred selling and producing your product or providing your service. Remember, spending your time and money wisely may provide the opportunity to enjoy your business more while making more money or at least having more fun with your horses. Think - plan - organize - execute - make/save money.
'If you can't measure it, you can't manage it.'
Bob Valentine, Ph.D., is founder and president of GenieCo, Inc., which specializes in providing Intelligent Business Systems for individuals and small to large business owners.
Dr. Valentine has been breeding horses since 1971. He is a professor of Equine Business Management at Colorado State University. In addition, Dr. Valentine writes a monthly equine business column: "Mind Your Own Business: Think - plan - organize - execute - make/save money."
You can reach Dr. Valentine at 1.888.678.4364 or firstname.lastname@example.org. GenieCo, Inc. is a Colorado Corporation and a member of the Rocky Mountain Innovation Incubator (RMI2).