5 Ways to Focus on Profits
As a business owner, do you feel you are not getting paid what you are worth? Have you not taken a profit distribution in years or not even know what a profit distribution is? Do you dread tax time because you do not have enough to pay your taxes regularly? Have you bought into the lie that that best way to grow your business is through bank loans or investors?
If your answer is”Yes” to any of these questions, then I recommend an intentional focus on Profit.
Below are 5 ways to focus on profits.
1. Know Your Financials
Any business owner has to have a basic understanding of their Income Statement, Balance Sheet, and Cash Flow. I realize that this is easier said than done in most cases. My goal is to work to educate business owners on why and how to do this. The biggest challenge is just having current financials. Most accounting software will generate these reports. A good accountant or bookkeeper can help ensure this is happening. The financials will not mean much unless you compare to something useful. At the very least, understanding revenue, expense, profit, and cash flow compared to last year, budget, and the monthly trend will be a great starting place. Ensure you have this within a few weeks of the prior month so that the information will have some value to you.
Do not rely on year-end tax accounting to know your financials. This is way too late and does not give you time to make any meaningful changes.
2. Routine Checks
Regular meetings to check your financials should be scheduled. Meet with your key personnel to discuss what is happening to trends. By having monthly or at least quarterly meetings, you can establish a routine of financial success and metrics. The hardest part sometimes is establishing a benchmark for meaningful information. It would be like going to a game and not knowing how the score is kept. Obviously, the score in golf is different than bowling. Try understanding tennis or even cricket without prior knowledge.
Once you have a basic understanding of revenue, gross or operating margin, and profit, you can better see if you are improving. If you aren’t saving any cash for taxes, bonuses, and distributions, inventory, or property and equipment, you could be in trouble. That leads me to “Profit First”.
3. The “Profit First” Dashboard
Mike Michalowicz’s book “Profit First” is an important read for anyone leading a business or working with business owners. The recommendation is to open separate bank accounts for Profit, Revenue, Tax, Operating Expense, and Owner’s Compensation/Payroll. You even open a Profit Hold and Tax Hold Savings account at another bank and keep it out of sight. Each quarter, you take half the money from the Profit Hold account for a profit distribution. Of course, the Tax Hold account is to pay quarterly taxes and ensure you have enough for annual taxes.
The reason why I think this is a genius idea is because it gives you a daily cash dashboard. You know where you stand and how much to spend for Payroll and Operating Expenses. You can even open other accounts for Inventory, Equipment, or possibly Reimbursable Expenses. The dashboard allows for quick decisions, peace, and a sense of control over your finances.
4. Plan for Success
A working business plan is essential for success. I am not talking about a business plan that you might create for an investor or bank and then never looked at again. I am talking about the plan that is used every day for your business. A plan that shows revenue by customer, product, and month. A plan for closing prospects or launching new products. The plan forecasts your potential expenses, hiring, profits, and cash flow. A plan that gives you a goal to reach that is reasonable.
A plan allows you to understand the financial impact of new business or not getting new business. It allows for quick decisions on what you can afford and what you should avoid. It saves you time and builds the organization. My favorite is that it decreases chaos which is expensive, time-consuming, and nerve-wracking.
5. Value Your Time
I can’t really talk about profit without talking about time. Of course, you know time is money, right? The hardest part for us entrepreneurs and business owners is to let things go that others can do. If you are doing something that you can pay someone $20 an hour to do, then why don’t you delegate it? Most business owners are probably worth $100-$500 per hour depending on the size of their organization. The more time you spend on the previous four ways to increase profit will be valuable and will itself increase profits. You have to be strategic, focus on business and product development, and train your team. Next week, I will talk more about the value of training and education, which is often overlooked.
All businesses should be in business to make a profit. Even a nonprofit should still be good stewards of the resources they have to accomplish their mission in the most cost-effective, efficient, and impactful way. Knowing your financials, developing routine checks, creating a “Profit First” dashboard, planning for success, and finally, valuing your time will result in increased profitability, which will allow your business to serve your customers and the community more effectively.