by Ryan Giles//
Did your business make a profit last year? If so, did it make as much as you would have liked? If not, don’t beat yourself up. In fact, most small and medium businesses did not make a healthy profit in 2015. As business owners, we invest our blood, sweat, and tears into our business…and it becomes our baby. However, we have to look in the mirror and realize that we may have an ugly baby.
After taking a long, hard look at your business, what can you do if you have a profit problem? First, don’t assume you can “grow” out of it. If your business is inefficient and unprofitable, adding more sales usually just makes you a larger, but still unprofitable business. Start by taking a look at your finances. One of the fundamental equations that you’ve probably learned in your business is: Revenue – Expenses = Profit.
This is logical and makes perfect sense, but it goes against human nature. If you’re like most people, you have a habit of spending what you make. This insures that your expenses always equal your profit (or worse, they’re greater than your profit). This means that you’re doomed to break-even in your business.
I propose that we turn the equation on its head: Revenue – Profit = Expenses.
If you’ll notice, the math still works the same. However, we’re now letting human nature work for us instead of against us. So, if your business makes $10,000 each month in revenue, and you want to make 10 percent profit, set aside 10 percent (or $1,000) before anything else. This leaves $9,000 for your expenses. I suggest moving your “profit” money to a separate bank account to make sure you don’t cannibalize it for expenses.
The next step is the hard part: learning to live on what is left. For this step, I suggest printing a list of all of your monthly expenses and reviewing them one-by-one to make sure they’re absolutely necessary. I’ve found that most businesses have a ton of small expenses charged to their credit card each month. If you’re hardcore, request a new credit card from your credit company. This will force each of your vendors to contact you for the new card number. Take this opportunity to evaluate the need for these expenses.
What if you don’t own a business? Have no fear, this works equally well for personal finances. Instead of a “profit” account, you can easily setup accounts for debt retirement, vacations, or any other big-ticket item you wish to save for.
If you’d like to learn more about these ideas, check out “Profit First” by Mike Michalowicz. He wrote an entire book on the subject (that I highly recommend).
This small shift in the way you look at your finances can have a huge impact on your future success!
Reach Giles at AGJ Systems at rgiles@agjsystems.com.