DOES YOUR jewelry business really make a profit? This question normally only gets answered annually when the financial reports come back from the CPA and often raises the question: Where has all the money gone?
But in this article we aren’t just taking into account the results from a financial-reporting viewpoint. When looking at the financial reports it’s important to add back any non-trading expenses (or non-trading income) to get a fair answer on business performance.
As part of tax planning, most CPAs will allocate income to owners or even family members to spread income and minimize tax. These allocations, however, may not reflect the fair contributions made to the business.
If you want to determine the business results you are achieving, add back any wage allocation that has been made to show the full business profit. Then you need to deduct a fair wage for all parties involved to show the true profit after exertion.
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When discussing end-of-year results, many business owners forget the return they make must be measured against two components:
Return on Investment: How much money has been invested in the store? There is a cost to any business ownership and that’s not only the cost of the investment but the opportunity cost of putting your money elsewhere. ROI needs to be based on the current value of the business investment, i.e. if the store were sold today how much money would there be to invest elsewhere? Based on this figure a return of between 20-30 percent needs to be achieved to reflect the fair risk involved with being a business owner. Some argue this percentage is too high given current interest rates. But I would counter with the view that business is more risky than it was five years ago and as such the risk premium, the difference between bank interest rates and the ROI you should seek, justifies this level of return.
Return on Effort: This part often goes uncounted. Owners are notoriously bad for discounting or even disregarding the time and effort they put into their stores. In reality, there is a cost to this — and again an opportunity cost of working elsewhere. What would you pay someone to do the hours you do and have the responsibilities you have.
So calculate the ROI you would expect from the money you have in your store. Add on the wages you or others would deserve for doing what you do. Then look at the total.
How does that compare to your profit for last year?
