How healthy is your business?
I’m not asking how big your business is or how much revenue it’s generating or how many employees you have. You know, those typical measures of success.
The origin of these misguided questions comes from how we’ve been taught to calculate profit. The age-old equation is: Sales - Expenses = Profit. As a result, business owners often end up paying themselves out of whatever is left over. Some months, there may be only scraps.
Running a small business is challenging – even more so when financial stress at work leads to financial stress at home. Often, when money gets tight, action-oriented business owners see growth as a solution to their financial problems. But this rarely works because growth requires investment – more money. The result: A roller coaster ride that’s not the least bit amusing.
Author Mike Michalowicz calls this the survival trap. In his book, Profit First: A Simple System to Transform Any Business From A Cash-Eating Monster Into A Money-Making Machine, Michalowicz shares his stomach-turning roller coaster ride as a business owner that led to his profit-first system.
Michalowicz transformed his business by paying himself first. Borrowing some simple ideas from the diet industry, he created this system:
Change from the profits-as-leftovers formula, Sales - Expenses = Profits, to the profit-first formula: Sales - Profits = Expenses. By claiming profits before expenses, you can ensure your business’s profitability.
Use small plates. We eat less when we use small plates. A single operating account is a “big plate.” When money comes into that account, divide it into four basic accounts: profit, owner’s pay, taxes and operating expenses.
Serve sequentially, eating your veggies first. Move your money into those accounts in that order: profit, pay, taxes and expenses. If you don’t have enough for expenses, it’s a signal you need to cut them.
Remove temptation – don’t buy cookies. Keep your profit and tax accounts in a different bank than your pay and operating-expense accounts so you won’t be tempted to steal from yourself.
Enforce a rhythm, or eat before you’re hungry or else you’ll binge. Pay your bills on the 10th and 25th of the month, not just after you make a sale.
I can see the profit-first system will transform my business, and I would like to hear about your experience, too. Email me at firstname.lastname@example.org. For more about Profit First, visit, http://profitfirstbook.com.
email@example.com. Durango resident and personal-finance coach Matt Kelly owns Momentum: Personal Finance. www.personalfinancecoaching.com.