Moving the Needle Toward a Profitable Business

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Today, I want to look at the first of two critical components that can really help you move the needle toward profitability.

  1. Products (The Items or Services You Sell)
  2. People (The Staff You Employ and the Clients You Serve)

Why are we talking about products and services? Because they represent what brings in your top line revenue, and honing your focus on your offering can really make big changes (for the better) with your profits!

One of the first steps in adopting Profit First and creating a profitable business is going through the Profit Assessment. I had the privilege of digging into the assessment of MY business with the author of the book himself, Mike Michalowicz. One of the first things he asked me as we delved into the top-line revenue of my business was, “What is the one area of your business- the product or service you are offering- that you know is not profitable?”

During my Profit Assessment discussion, Mike challenged me to question everything and make no assumptions about our service offerings. I have since realized that just because we have always done things a particular way, we did not have to continue doing them the same way forever.

You’ve probably heard it before – the definition of insanity:

To continue to do the same thing over and over and expect different results.

Mike helped us and many other businesses identify products or services that weren’t profitable. In our case, that meant transitioning a service that wasn’t in our primary focus to an expert company that works well with our team. Making this change has helped us center our entire focus on our passion: helping business owners find the missing profits in their businesses.

So today, I’m asking you, What is the one area of your business- the product or service you are offering- that you know isn’t profitable? Are you holding on to a product or service simply because you’ve always done so, or because you assume it’s a standard in your industry? I challenge you to take a hard look at your top line revenue and what it represents.

I would love to hear from you about a product or service offering in your business that just isn’t profitable and what you plan to do about it!

Whittle Down Your Operating Expenses

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Last week, we discussed setting up your Profit First bank accounts. This week, I want to discuss that infamous line item- Operating Expenses.

We hate them. They keep us up a night. They can become like a runaway train. Before Profit First, you wouldn’t really know whether your expenses were too high for your size business. But most business owners have a gut feeling about Operating Expenses, and it usually isn’t pleasant. I doubt I need to do much to convince you that your operating expenses are probably too high!

So now that we’ve just put that out there, let’s say it again:

Think back to when you first went into business. You were creative! You found a way to eek out every dime. You made do with what you had, and things worked just fine. Then, as your revenue started to grow, you added on more expenses: Maybe more staff. A larger facility. Nicer furniture. Better software. And more software. Fast forward to now, and you may feel like your operating expenses are either:

A. Too high.

B. Necessary.

C. Both

Want to know my ah-ha moment about expenses?

Branded water bottles. Yes. Those nifty bottles of purified water that had my logo, contact info and value proposition on them. We originally placed an order for a case of them for a function we were sponsoring (where we later discovered water was already provided). Then, we started buying them for clients who came to our office to meet, because store-bought bottles of water are just so… Ew! Then, we kept on buying them since we wanted to keep our “bulk” rate that we had signed up for. As you can see, this bottled water thing turned into an expense that was completely unnecessary. When we took a step back and priced regular water bottles, whoa! They were a third of the cost of the fancy branded water!

So, what’s your “branded water”? Here are a few ideas we’ve seen:

  • Office space you don’t need? (Maybe you don’t need the fancy office and can scale back a bit.)
  • A crazy amount of snacks you buy for the break room? (Have people bring their own and save yourself some cheese.)
  • Software you are charged for each month but never use? (Get creative with software usage and see which apps you can combine to eliminate some costs.)
  • Vendors that charge too much? (Shop around!)

I encourage you to assess ALL your automatic payments and whether or not you truly need those purchases. I’ll bet you find a few that you don’t need! I want to propose to you than you should get creative again and whittle down your operating expenses. Once you have pinpointed those expenses that are unnecessary, cut the cord! (And please comment below to let me know what items you cut.)

Setting Up Your Profit First Accounts

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In last week’s blog post I likened typical Bank Balance Accounting to a financial gumbo, where all the key ingredients of a business are swirling around in one pot. Then, I introduced Profit First and explained why it’s SO needed in our businesses. I said:

Profit First teaches us that we should take those ingredients out and individually assess them, even going to the extent of setting up separate bank accounts for each of the key ingredients. Then, we work a plan to allocate pre-set percentages to each key area. When we follow the Profit First plan, we can continue with our old ways of Bank Balance Accounting, but we are truly only spending what is AVAILABLE to spend.

Now, let’s dive in!

Profit First teaches us that we must separate those five key ingredients to successfully manage them:

  • Income
  • Profits
  • Owners Pay
  • Taxes
  • Operating Expenses

I am a Certified Profit First Professional and want to run a Profit Assessment on your business! When you come in for a Profit Assessment of your business, we will show you how you are currently spending your money in each of these 5 areas. Also, we will show you what your Target Allocation Percentages, or TAPs should be for your own business. (Each business is different, but businesses of the same size (annual gross revenue after cost of goods sold) should have about the same TAPs.) Don’t panic if your business’ allocations are currently WAY OFF. That’s normal, and perfectly ok. For now. What matters is that you start taking baby steps toward your TAPS. How will you do that, you ask?

Setting up your Profit First accounts looks like this:

  • Income Account– This could be your existing bank account. It’s where all the money comes in, and it’s the place from which you make transfers each month. We will be having discussions about your income streams, your product offerings and your customers.
  • Operating Expense Account– This bank account is strictly for operating expenses. You transfer money to this account two days each month- the 10th and the 25th. You can spend every last dime in this account, but know that these funds are only for operating expenses. While your greatest allocation percentages will be directed here, it may be less than what you are currently spending on operating expenses. We will begin having direct conversations about your operating expenses and ways to trim them.
  • Owners Pay Account– This account is only for your paycheck. Haven’t been taking a paycheck? Now, you will! Even if it’s only 1% of your gross receipts this month, it’s a start, and we WILL get you to where you need to be.
  • Profit Account– This account is important and very special. It’s what I like to think of as the Rainy Day or Opportunities Account. Profit First strongly suggests that you put this account at a different bank from your Income and Operating Expense Account so you aren’t tempted to easily transfer money. The amount that we have you allocate to this account may be small at first, but it will add up over time. And each quarter, you must take a profit celebration from this account (half of what’s in there at the time). This celebration can be used in many ways- to benefit your family, to pamper yourself, to treat your employees- but YOU get to decide.
  • Tax Account– This is what I think of as the Peace Account. When you start putting the correct allocations in this account, and it’s time to pay your tax bill, you won’t even notice. No more stress every March when the IRS was previously draining your account. It’s just taken care of, and you don’t have to worry!

Does this sound a bit daunting to you? That’s ok. I understand. I want you to remember these two words:

As your Certified Profit First Professional, I will:

  • Create your Profit Assessment and work with you to determine your TAPS.
  • Help you set up your new bank accounts in QuickBooks and establish an allocation/transfer rhythm.
  • Remind you of the transfers you need to make and even tell you the amounts every 10th and 25th.
  • Coach you on your progress as you move toward your TAPS.
  • Help you really move the needle toward profitability.

Want more information? Contact my office to schedule your complimentary How Healthy Is Your Business consultation!

Next week we will discuss two ways to really impact your profits!