Fix this Next: The Second Level, Profit
I have heard this more than once in my life – I have reinvested my profits back into the business. Mike said it another way that I have been pondering. A reinvestment of “profits” is an expense. Period. I’ve decided that even though we may show a profit on the Profit and Loss statement, he is right. If that cash is used for expenses, then it’s not really a profit. It’s all in how you define profit. There is the General Accepted Accounting Principles that say Income-expenses=profit. There is also the Profit First way which says Income – Profit= expenses. I had never really thought about it quite like this – if you do not take the profit as a dividend, then it’s not really a profit.
The five core needs of the profit level in the hierarchy are:
Debt Eradication – leveraging credit is not wrong; however, spending on credit cards or lines of credit without the thought of how you will pay it back is not wise. I know this is hard to hear, but I really have to say I agree with this statement. When you can’t pay your bills, you can’t afford your bills. There are only 2 ways out of this – Cut costs and increase margins. Notice I didn’t say increase sales.
A few other tidbits that Mike says … Cut the fat not the muscle. No one is asking that you sacrifice your business or that you don’t put food on your table. However, the kind of food on your table…
Adjust the business and your lifestyle so that no new debt accumulates. We want cash to accumulate to pay off the debt.
And finally – you must make it a game that gives you joy. In order to stay on the path of eradicating debt… it must give you pleasure.
Margin Health – You can’t have a discussion on profit unless you address margins. I know many of my insurance agents don’t have the ability to choose the price of their products; however, you do have a lot of say in the COST to sell your product.
I recently did an exercise with my CEO group. We are all accountants, so it’s easy to compare apples to apples. We are all in different stages of our businesses, but when we compared our margins – WOW – it was amazing to see our percentages were all about the same. That gave me great comfort that I’m heading in the right direction.
Transaction Frequency – The key nugget I got in this section… you need to seek ways to do more business more often with your customers without diluting the quality of work. We can not be all things to all clients. To get ahead faster, put together an avatar of your ideal client. Learn the demographics and what they want and then start to sell to them. Is it better to have 200 clients paying you $50 a month or 50 clients paying you $200 a month?
Profitable Leverage – I love this. “Debt can be a valuable tool when it is used to amplify clear profit opportunities.” If debt is used to run the business operations or to purchase cost of goods sold, then it is probably not profitable leverage. It’s all about knowing when you will receive a return on your investment. Think buying a building or equipment. Think favorable terms on your Cost of Good Sold where you will get paid before you have to pay your vendor.
Cash Reserve – I think this is one of he hardest to accomplish. The temptation is always to “reinvest” cash back into your business. Take it from me, it is not smart to be without a reserve. A reserve can help you through a rough patch….hum say like a pandemic. I’m just thinking out loud here.
There you have it. The Profit level of the Business hierarchy of needs. I hope you have found a tidbit or two that will help you make the next decision in your business.