What Difference Does It Make?
Everyone starts their business on a shoestring. OK, I’m sure there are some folks who are fully funded when they start, but not many.
The reason that’s important is that it means that everyone starts out doing everything by themselves. Need marketing? You do it. Want a social media program? Design it yourself. Legal help, accounting? Well, you see where I’m going.
The problem is that this is also how we treat our income. Make a sale? Plow it back into the business. You’ll get your reward when you are successful, when you “make it.”
That’s the real problem. So many are defeated in their quest for a successful business by the attitude that they work their heart out, spend every penny on stock or material or services or what ever, and never see any benefit to themselves or their families. I had a client express that very thought to me today. Why should he continue to bust his butt and his only reward is more taxes and more expenses.
Well, here’s and idea: how about putting aside your profit on a regular basis before you spend any of the money you receive? Even if the actual amount is small, every sale you make should result in a deposit in your profit account. And, as you struggle and solve the problems that come up by becoming more efficient and more proficient, you know that that little nest egg is sitting in the bank awaiting your distribution day. Further, you learn by doing your business ways to increase your efficiency and increase your profits so that each quarter you can add another percentage point to your nest egg. And then the time comes that the quarterly distribution is really something. Remember those commercials about “going to Disney World?”
OK, this is the short version of a powerful and effective concept called Profit First. The usual accounting formula goes
Sales – Expenses = Profit.
What if we change the position of just two of those terms and make the formula
Sales – Profit = Expenses?
No, this doesn’t make more money appear. But it makes you conscious of your money and how you use it in your business. Once you have your profit tucked away, you won’t want to get it back out to spend on expenses. So then you start getting smart about how you spend and what you spend on.
Remember the questions at the top of the page? Well now you begin to learn which of those services or providers are worth what you pay them, and which are not. You begin to learn what expenses you need to create and which you only want to create. Remember, the alternative is to give up some of that profit you have already set aside for your self.
Increasing sales is also important. But you must learn to be smart in gaining more sales. Not just “anything for a buck,” but creating a sales stream of profitable clients or products that is in keeping with the vision you started your business to fulfill.
More changes start happening than just word order when we start paying ourselves first, and learn to limit expenses, find new ways to do things, and improve our efficiency in order to make sure we have a profit. And that means now, not some day, not when we “make it.”
Join me in my own quest to reform my business in the model of a Profit First business. Watch for future blogs and emails expanding and explaining the concept.
Right now, take a few moments and write down your total sales for the last three months, then deduct your expenses and look at the total. Is it as much as you have paid yourself? Could it be a negative number? Even if it is a positive number, does it provide you with a celebration or does it just meet your needs? Use this as a benchmark to gauge your financial growth.