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Lynn Wise

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Profit First: Taming Your Money-Gobbling Monster

Posted by Lynn Wise on Apr 7, 2018 9:00:00 AM

Profit First: Taming Your Money-Gobbling Monster

Are you familiar with Profit First? It’s something I explored in my previous article, but even if you didn’t read it, you may have heard of this revolutionary approach to cash flow. Based on the best-selling book by Mike Michalowicz, Profit First presents a simple way to rethink your business accounting. While the conventional cash flow formula is revenues minus expenses equals profit, Profit First offers a subtle tweak: Revenues minus profits equals expenses.

In other words, it’s an accounting paradigm in which you set aside profits from each bank deposit you make, and only then do you pay the bills. It forces entrepreneurs to proactively set aside real cash earnings, and it can transform any business from a money-gobbling monster into a profit-generating machine.

In short, it’s all about taming the beast that is your business—but where to start, exactly?

 

Understanding the Problem

It’s probably fair to say that most business owners review their income statements infrequently. Chances are, you simply don’t have the time to review your important financial documents every single day, and that’s okay! But you probably do check your bank account daily—if only to make sure you’ve still got enough in the reserves to cover the day’s operational expenses.

This is human nature: We want to know what’s happening now, at this very moment, and to make our decisions based on that snapshot of information. There’s actually a psychological term for this tendency; it’s called the Recency Effect. This is the human inclination to overemphasize the right now. This practice of making financial decisions based solely on the current account statements is also called Bank Balance Accounting.

Bank Balance Accounting is common, but also problematic. It’s all but impossible to make real long-term plans or to prepare our companies for growth when all we’re looking at is today’s balance. Business owners who rely on Bank Balance Accounting tend to fall into the Survival Trap—not necessarily working toward a vision or a long-term goal, but simply doing whatever’s required to keep their business afloat in the here-and-now.

The other piece of the puzzle is GAAP, or Generally Accepted Accounting Practices. It is the paradigm that most small businesses use, and the one that often goes hand-in-hand with Bank Balance Accounting. GAAP simply refers to that conventional formula discussed earlier—Sales minus expenses equals profits.

GAAP makes logical sense. What it suggests is that we should sell as much as possible, spend as little as possible, then pocket the difference. The math checks out! The problem here is human nature. We’re not logical creatures and GAAP may make numerical sense, but it hardly makes “human sense.” All too often, GAAP manifests as an obsessive desire to sell more and more, to make your company bigger and bigger, improving top-line revenues and hoping that translates into a big increase in profit. Again, it’s not really a visionary approach. It’s all about doing something now to keep the company afloat. But the real problem is that, as we grow our businesses and making them bigger and better, it causes operational expenses to balloon. The more we make, the more we spend. Essentially, there’s nothing left to claim as profit.

 

A New Way to Consider Your Business’s Financial Health 

In short, what business owners need is a way to monitor the financial health of their business while also working toward real, long-term growth solutions. Profit First provides exactly that, and it does so in a way that uses our natural human behaviors advantageously. In fact, Profit First actually encourages business owners to continue with their Bank Balance Accounting habits!

Maybe you’re ready to get started with Profit First and learn how you can actually be smart about generating business profits. I can recommend a few action steps: Draw a line in the sand today and commit to taming your money-gobbling monster. No more paycheck-to-paycheck living. No more survival mode. Make real growth your goal!

A Certified Profit First Professional that is knowledgeable about home services businesses can coach you on the best approach—how to tame your beast and turn into a cash generator. Ask your Profit First Professional about taking an Instant Assessment, which can provide you with some specific numbers and calculations as you rethink your business accounting practices.

Your company may seem untamable, but Profit First can work for any business—assuming you pursue it with the right coaching. Take a minute to seek a Certified Profit First Professional today!

 

Service Roundtable is dedicated to growing your bottom line and helping your business maximize its full potential. These group of contractors work together to assist you with marketing, sales, business, and so much more. Twice a month, seminars around the United States and Canada are held to network and further assist your business. Visit Service Roundtable.com to see if there are Success Days in your area!

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Topics: Business Growth, Marketing, Branding, business culture, Building a Business, Business Leadership, Management, Leadership, Plumbing, hvac, learning, knowledge, team building, creative marketing

Is Your Business Truly Profitable?

Posted by Lynn Wise on Feb 10, 2018 10:00:00 AM

Businesses exist for many reasons—to provide goods or services, to fill a need, to address consumer pain points—but ultimately, they exist to make money. As such, it’s alarming how many smaller companies actually aren’t generating as much as they should. They may make revenues, but they don’t necessarily save any of that money in the bank as pure profit. The effect on the business owner is a constant feeling of treading water; never going under, but also never feeling like the business is growing.

Believe it or not, a lot of this has to do with the business owner’s mindset—and a change in perspective can unlock surprising profits in your company. It’s a model called Profit First, outlined by author Mike Michalowicz in his Profit First bestseller. The book and its insights have revolutionized countless businesses. In this post, we’ll show you how they can revolutionize yours.

 

The Problem with Your Accounting

There’s a decent chance that your company uses the GAAP accounting model, even if you don’t necessarily know it by that name. This has long been the conventional accounting framework; in fact, that acronym stands for Generally Accepted Accounting Principles.

What it boils down to is this: SALES – EXPENSES = PROFITS. Your revenues, minus your expenses, equal your profits. It sounds right. Mathematically, it checks out. But in fact, it’s nonsense. The way you know it’s nonsense is that so many of the companies that use this accounting formula have no profits to prove it.

 The Profit First model inverts this formula just a bit. In Profit First, the math looks like this: SALES – PROFITS = EXPENSES. That may sound like a minor variation, but actually, it makes a world of difference. This particularly makes a difference in the business owner’s behavior.

 

Understanding Parkinson’s Law

But why does this inverted formula change business owner behavior so drastically? For an answer, we look to Parkinson’s Law, an observation attributed to author C. Northcote Parkinson. He famously stated that our demand for resources rises to meet the supply. That means if a project is allotted two weeks to complete, it will take the full two weeks. If it’s allocated five weeks, it will take five weeks. You get the idea.

Profit First uses this law to your advantage. Here’s how: Rather than paying your expenses first, you start by putting aside some money as pure profit—literal money in the bank. What you’re left with, you use for expenses. Remember Parkinson’s Law: The demand for your resources (in this case, money) adjusts to the supply. When you set aside profit first, you simply learn to do more with less money; in other words, your expenses are minimized.

 

Just Look at Your Bank Account

If you’re unsure about any of this, let’s come at it from a different angle: bank account balancing.

Frankly, most business owners don’t have the time to read all the different accounting statements that are available to them. This includes balance sheets, cash flow statements, and the list goes on. As such, they resort to bank account balancing. This simply means looking at your bank account and making financial decisions based on what you see there.

Business owners who use Profit First have a big advantage. The difference is that, with a Profit First mindset, you take a portion of your deposits and immediately allocate them to profits. As such, when you look at your bank account balance, you see what’s available for spending after those profits have been claimed, and you adjust your spending accordingly.

 

Using Your Habits to Your Advantage 

One of the great assets of the Profit First model is that it doesn’t really require you to change your habits, rather it allows you to use them more advantageously. After all, simply forcing yourself to become more financially disciplined is a hard thing to do. However, being proactive in setting aside profits each month, then letting your natural spending habits kick in from there, is very doable.

You, too, can learn to use Profit First by setting up some savings accounts, forcing yourself not to “borrow” from your own profits, and ultimately turning your cash-eating monster into a money-making machine. Start thinking in terms of profit first and put cash profits in your business today!

 

Meta description: Many businesses make profit an afterthought—but the Profit First accounting system can help any company become more profitable.

 

Social media posts: 

The #ProfitFirst system can revolutionize any company’s approach to #cashflow—but where should you begin?

Does your company devour cash, without generating profits in return? If so, #ProfitFirst is for you.

 

Service Roundtable is dedicated to growing your bottom line and helping your business maximize its full potential. These group of contractors work together to assist you with marketing, sales, business, and so much more. Twice a month, seminars around the United States and Canada are held to network and further assist your business. Visit Service Roundtable.com to see if there are Success Days in your area and do not forget to register for International Roundtable in New Orleans on April 4 - 6!

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Topics: Business Growth, Marketing, Branding, business culture, Building a Business, Business Leadership, Management, Leadership, Plumbing, hvac, learning, knowledge, team building, creative marketing

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