It’s that time of year again! Holidays are done. More importantly – Holiday spending is done. And it’s time to look ahead into the new, exciting year and plan out how you’re going to make it the best one yet! Budgeting or Projections may be on your mind and with those, generally there is a focus on the bottom line, i.e., profit.
Well, what if I were to tell you that profit is actually a choice!? A choice that you CAN and should make every day, every week, on every deposit?
And what if I were to tell you that there is an easy system to ensure this happens that also has so many other wonderful side effects? Pretty cool, huh? Well let’s dig in…
I would like to start with the basic premise that money is neutral. It is neither good nor bad. What one does with it could possibly be construed as good or bad but the money itself is neutral. It takes on the energy, the intention, that we give it. Keeping that in mind is a really good, basic starting place for what I am about to tell you.
As I stated earlier, profit (money) is a choice and not understanding this is what gets many business owners into a lot of trouble. The way we have been taught about money in business is by using the age-old equation “Sales – Expenses = Profit”.
In using this equation, we are putting profit last, an afterthought, ‘the last kid to be picked for kickball’. We are relegating it to a place of least value and then that is how we perceive it – believe it or not. And that is why so many business owners struggle to maintain a healthy profit in their businesses – because it isn’t the priority. What is the priority is what comes first, “Sales”, which is extremely important – no doubt about that. But when the sole focus in any organization is sales, what happens is that the expenses rise right alongside it – and often exceed the sales (thus creating a loss). When you change up the equation and make it “Sales – Profit = Expenses”, everything changes.
Using the above equation, you keep the emphasis on sales, but the very next top priority is profit! And that absolutely should be the next priority because profit serves so many purposes in a business and a business cannot survive without it. And by taking the profit first it safeguards the business from creating excessive bloat that is extremely common and often very hard to see… until the damage is done. And can be even harder to get rid of.
And that isn’t to say that for every $1.00 in sales, you should be taking $.99 in profit. Of course not. Unless that is your business model and if it is, I want in. But every single business should have a budget, a set of projections, or at minimum an idea, of how much their business should be making in profit. Maybe it’s 5%? Maybe 10%. But why not start there, take that first as if profit was its own vendor, and then run your business on the rest?
It works simply like this:
Rather than taking the bottom line as profit – the leftovers – you take a small percentage of the top line. Whenever money comes in, the percentage you have calculated is immediately taken away and reallocated so it can’t be spent on expenses.
You can give this to yourself, as wages or dividends, and the rest goes into an untouchable savings account – a ‘rainy day’ fund.
Profit First, a book written by Mike Michalowicz, backed by a growing organization of thousands of bookkeepers, accountants, and coaches worldwide “Profit First Professionals”, introduced and explains this philosophy of taking profit first in his best-selling book. And using this philosophy, he created a cash management system that transcends every industry and is a true game-changer for any business struggling with profitability.
When you take your profit first, you’re in the driver’s seat. And when you’re forced to operate your business on what is leftover, your expenses, as it should be, you look to create wonderful and amazing efficiencies in your business to make this happen. And while your business is running so efficiently, it grows. And if you’re growing AND taking your profit first – the sky is the limit.
This article was written in partnership with getWise - a technology platform that provides on-demand expert advice for small businesses and women to accelerate their business or career.