What does every business owner struggle with? Money, that’s right. Entrepreneurs should be thinking about profit above and beyond everything else. There’s no shame in it and in fact, it’s a necessity. I like to talk about a primary profit mindset, and that goes right along with this. We have to look after ourselves first before we can help anyone else.
I had a chat with Mike Michalowicz about Profit First and why brand entrepreneurs should be thinking about profits above everything else. Together we bust myths and kick some business owners in the rear to show that it all starts with how you become profitable.
There’s an elephant in the room, ladies and gents. Most businesses are surviving paycheck to paycheck. As these businesses grow, the entrepreneurs behind them are barely scraping by. They have false hope that their business will be saved if they land that one big customer, but that never happens. Even if they do bring in the one big customer, they incur new expenses to support what that customer wants. As their income escalates, their expenses escalate.
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The problem is not the entrepreneur. It’s the formula we’ve been told to use.
Sales – Expenses = Profit
We’ve all been taught this. The issue with this formula is that we focus on sales and pay to support those sales and then whatever’s left is profit. Get that? Profit is a leftover. That’s absurd. Your profit is not an afterthought. My smart friend, Mike, flipped the equation.
Sales – Profit = Expenses
You sell as much as you can, and then you extract your profit first. Take a percentage of the money that comes in and immediately reserve it for profit. The leftovers are expenses.
While mathematically these equations are identical, behaviorally they’re vastly different.
This is something that people just don’t discuss, and it’s HUGE. I love the idea of a small business owner turning around and taking profit first. Ask yourself, why am I waiting until the end of it all? Work around that and figure out what it would take to get your percentage on every sale you bring in.
This can change the lives of so many entrepreneurs. When we want to achieve a goal, it’s always reverse engineered. We first decide where we want to end up. We define what we want, and then we figure out how to get there starting today. We reverse from the end goal. The absurdity of business is that we never talk about what kind of profit we want to walk out with.
Accountants tell their clients to look at their statements from the balance sheet to their cash flow. But how many of those clients are profitable? You might be surprised. Not many accountants talk about how to become profitable. They leave that up to us! While the numbers are there in your accounting system, too many of us are spending what we have. We revert to bank balance accounting. We check our bank account every single day, see the bank balance, and then determine what we’re going to do with our money. Most entrepreneurs do that.
Instead of trying to force ourselves to behave differently, why don’t we just continue that behavior? But instead of having one main checking account, set up additional accounts for your profit, for paying yourself, and for reserving income for taxes and the like. By spreading out your money throughout these accounts, you’ll notice that the thousand dollars that came in isn’t all available for expenses. It changes your entire perspective on what’s available for your business and what’s not.
If you’re doing $1-$250,000 in revenue, you can allocate up to 60% of your money toward owner’s pay. When you run this analysis on your own business, it could be a big eye-opener. You’ll realize that you’ve taken nothing for yourself, left no profit, and pumped everything into expenses. How is that sustainable?
We often talk about how business ownership is tough with major ups and downs. While I’m not the greatest business owner on the planet, I’ve started and continued to run several businesses where I’ve learned very important lessons. I can tell you something right now, a lot of those lessons had something to do with money. Point blank, the really important lessons have come down to hardcore cash.
The very first thing you’ll want to do to get your business in line with a profit mentality is set up a profit account at a separate bank. Then, one percent of every deposit that comes in goes into that profit account. If you have $100 in your account, you would take $1 and move it to your profit account. You won’t feel the impact of taking this little amount of profit. The profit is out of sight and out of mind. This is pretty powerful. If you simply do this one step, you start building a profit habit. You’ll have the behavior and the courage to continue it and make that profit number bigger.
