It’s all about the Benjamins baby! Or is it?
When we get into business we don’t always get into it for the money. Many times we have a why, a purpose that drives us. But, let’s face it, we can’t fulfill our why or our purpose many times without the funds to do so. I work heavily with nonprofits. They aren’t in it for the money. They have a mission that drives them in all they do. Many of the nonprofits that I have worked with are seeking to solve some social injustice or to meet basic human needs. If you ask any of them they will tell you that they could always use more money to put towards their mission. Business owners are no different. We can all use money to achieve our goals. Even if your your goal of being in business is to give your profits away to charity, you still need money to do that. I am no different. I have a purpose and driving goals in my business. They require money. So when I ran across Profit First, by Mike Michalowicz I was intriqued. Here was a book that made so much sense to me and I quickly implemented its methods in my business.
So what is Profit First?
Profit First is a book by Mike Michalowicz that explains that Profit is what we really seek, not revenue and it unfolds a great system to maximize the profit in our businesses. The main equation is Sales-Profit = Expenses. So did that throw you for a loop? Isn’t it Sales-Expense = Profit? Well, that is what tends to get entrepreneurs into trouble. If we simply use this equation then we will spend what we have as that is human nature. The Sales tend to drive our expenses. One of the first things that you implement as part of Profit First for your business is to see what percentage your operating expenses are of your real revenue. You can do that for yourself by clicking here and following the instructions in the Instant Assessment. In only takes a couple of minutes. What does your Operating Expense percentage look like? Is it greater than 30%, 50%, 60% or more? Many small businesses that I work with have operating expenses above 85% of their real revenue. This is too high to see any real profit in the business.
I have lots of money coming in, why am I broke?
After discovering the Profit First method and implementing it in my business I became a Certified Profit First Professional so I could help others get out of the poverty that exists for entrepreuneurs and for nonprofits! I hear it all the time from clients that seek to work with me that they have been in business five, ten or even twenty years but they have no clue why they are broke. They tell me their revenue figures as examples of a thriving business but what they don’t see is that they are spending every penny of what they sale and many times even more going into debt. I recently took on a client that could not understand why they were continuing to lose money after implementing many cost reductions in the business over the past year. Once I completed the intial assessment (a deeper dive than the instant assessment link in this blog) I found that the cuts were simply not enough. The company was hemorraging money faster than they could make it. How will you ever get out of debt, pay yourself what you deserve or fulfill your tax obligations if you can’t pay what you owe currently?
The initial focus of Profit First is analyzing operating expenses and getting them in line for the real revenue you are generating. Until you do this you will never be able to allocate your funds to the other accounts, pay down debt or take that profit that you deserve. Those dreams of helping others, taking your family on a month long vacation or whatever it is that you desire will be unreachable. You learn that you don’t have to have that dreaded word, budget, but you do have to operate within limits. Profit First outlines those limits for you and through a rollout plan and implementation you can achieve the things you set out for.
How is this done?
It is achieved through the same habits that non-accountants already have – bank balance accounting. Every morning you check your bank balance to see how much money you have, what has cleared the day before and what has been deposited. It’s the pulse that business owners live by and guide their decisions. Accountants and bookkeepers will tell you that it doesn’t tell the full story but it is what most people use. So instead of fighting against those habits we simply use them to our benefit.
Are you interested in learning more? You can explore more about Profit First and learn more about how it works here. If you are looking for a bookkeeper who is a Certified Profit First Professional who can help small businesses and nonprofits, you can check out my services offered here, then contact me for a free 30 minute video consultation. Learn More Here is a link to some additional Resources for Small Businesses and Nonprofits.