How much does that cost?  

 

One of the ideas behind Profit First is borrowed from a fitness expert who spoke about how unhealthy the whole “clean your plate club” philosophy is.  In fact, in his book Mike Michalowicz asks himself, “If I reduce the ‘plate size’ of my business’s operating account, will I spend differently?”  By reading his book, you find that he later answers himself with a resounding “Yes!”

 

The whole idea behind Profit First is to move funds onto different “plates” like the Profit Account, the Tax Account, the Owner’s Pay Account and away from the Operating Expense Account.  This results in two things: 1) guaranteed profit every quarter because there is money in the Profit Account and 2) reduced availability of funds in the Operating Account.  The idea here is both to inspire the owner by providing profit but also to inspire the owner to reduce costs to keep from overspending their Operating Expense money.

 

This means that just moving money toward profit isn’t the end of the process.  The next step is to start examining costs in order to make sure that they are being controlled to match the percentage goals for Operating Expenses.  Everything should be looked at and evaluated for its necessity.

 

Easy steps would include checking with services like credit card processing, payroll services, utilities and suppliers to make sure that you are receiving the best price for the services that you are receiving.  Regular reviews of these services are advisable because there are always offers and specials being run that would reduce the costs for these services.  Your Profit First Professional is the perfect partner to help you review these costs.

 

As the percentages of money increase in the Profit Account and decrease in the Operating Expense Account, it will become even more challenging to find ways to economize.  This is where it becomes interesting and fun.  This is where you get to play “Apollo 13”.

 

Millions were spent on the Apollo 13 project to produce a state of the art spaceship that would safely transport men to the moon and back.  Unfortunately, it failed and the men were in mortal danger.  In the attempt to save them, the engineer on Earth walked in with a couple of hundred dollars’ worth of equipment for the astronauts to use to build a replacement for the million plus dollar scrubber that failed.  Fortunately for the astronauts the engineers were successful.  The lesson for us business owners is that when we are forced to, we can find new and innovative ways to do what we do for even less cost.

 

Good luck and happy cost saving.  Make sure to use the resources provided by your Profit First Professional to help guide you through this examination.

We don’t need no stinking credit cards….

This parodied line from the classic movie, The Treasure of Sierra Madre, is reminiscent of talking to small business owners about taking credit cards. They frequently talk about how they don’t want to “give someone” 3% of their money “for nothing”.  Their customers “have no problem” paying by cash or check.  Such thinking always makes me cringe because what they don’t seem to understand is, they are costing themselves huge amounts of business to “save” 3%.

Let’s look at some facts:

  • According to the website CreditCards.com, 48% of those surveyed (1000 people who owned both a debit and a credit card) prefer to use a credit card and 30% prefer to use a debit card while only 9% prefer to use cash.
  • The rest use things like PayPal or other forms of e-payment.
  • Of all non-cash forms of payment, only 15% are checks while 59% are credit or debit cards and 18% are ACH.

So what does this tell us?  Those who are “saving” themselves 3% are losing at least 48% of their potential market (those who prefer to pay by credit card).  If you consider that 9% prefer to pay by cash and of the non-cash crowd, only 15% of them will pay by check, that’s only 24% of the market so that makes that 48% a generous number.  This means that a retailer whose customers “have no problem” paying by cash or check is dealing with only 24% of the potential market they could have by accepting credit and debit cards!!!  That’s 3 out of 4 possible customers walking past their door because they won’t accept credit cards.

Another fact shown by a Dun and Bradstreet study is that people spend 12-18% more when using a credit card instead of cash.  This means that those retailers who don’t take credit or debits cards aren’t actually “saving” themselves 3%, but are actually “costing” themselves 12-18% of what their customer might spend if they could use their credit card instead of cash or checks.

The bottom line here is that while there is a cost to accepting credit or debit cards for your business, the cost of NOT accepting them is even greater.  Not only do you open yourself to a much bigger share of your potential market and make it likely that every customer that you serve could potentially spend 12-18% more every time they step into your establishment (that’s $12-$18 more for every $100 you already make), many credit card providers (especially AMEX) promote small businesses that accept their cards through a variety of marketing venues.  This is just free advertising for your business.  Who wouldn’t profit from that?

You need a Profit Assessment NOW – but why?!?

For those not familiar with the Profit First plan, you should know that the first step towards small business profitability is having a Profit Assessment done by a certified Profit First Professional. This is a thorough review of your books, performed by a highly-trained professional who uses the proven Profit First system.

Why, you may ask, is this necessary? To answer that, let’s consider the “couch potato” who suddenly becomes inspired to train to run a marathon. It should be obvious to anyone (if not, it would become so quickly after the first attempt to run), that you can’t just hop off the couch and run 26 miles. There are some things you need to do first:

1. You need to evaluate what your current physical condition is. Are there things in your past that affect your current condition but were only “one-time” events? Do you have some sort of restriction that would prevent you from training properly? What are your physical strengths and weaknesses? What is your resting heart rate, respiratory rate and blood pressure? What are those vital signs after 5 minutes of exercise?

2. Now you need to take this information, which is your starting point, and get a true picture of where you are. Only by knowing, with certainty, what your current condition is, can you begin to understand what is needed to reach your end goal of running and finishing a marathon.

3. With this information, now you can begin to develop a training regime. Do you need to spend time doing weight training to build up muscle? Do you need to work on cardio endurance to allow for distance running? What is the proper ratio between the two that will best get you to where you need to be? All of these questions are answered in the training program prepared by your coach.

A Profit Assessment is like a physical evaluation for your business. Your Profit First Professional will review your company’s books to look for unusual expenses and unusual revenue. They’ll determine what your year-over-year operating expenses are and how they relate to your profitability and how much the business-owner gets to take home in profit. They will take your company’s pulse and blood pressure.

Only once this is done, can your Profit First Professional start your company and you down the road to consistent profitability. With this information from the Profit Assessment, your Profit First Professional can work with you to map out a step-by-step “training plan” to help you achieve your goals. They will work on the areas that need the most attention while continuing to support those that are already healthy.

THIS is why you need a Profit Assessment – NOW!! Get off that couch and make that call!!

Kiss your business

In business, as in the rest of our lives, it is always best to Keep It Simple S….(whatever adjective starting with S you’d like to use).  In reading a book by Justin Harrison called Get Off the Bench, I came across some very interesting and helpful principles about simplicity that I wanted to pass on.  Although his book is written for those interested in multi-level marketing, specifically doTERRA, his ideas on simplicity in working your business rang true for all sorts of small business owners.

For some reason, simple has become a synonym for unintelligent. (p. 42)   He goes on to correctly point out that we often feel that the least complex answer to our problems must be wrong.  We will spend lots of time and money trying to solve problems and avoid some of the simplest answers.  Not making enough money in your business?  Stop giving it all away to others like your associates, vendors, and tax collectors.  Make sure that you allocate some to yourself first.  Simple, right?

Unsure about how your business is doing and where you should be focussing your time and money?  Look at your financial reports, your Profit and Loss and your Balance Sheet.   These documents contain all the information you need to evaluate your business’ strengths and weaknesses.  The data you enter into your accounting program (QuickBooks, Xero or even Excel) is your business’ way of telling you how it’s doing.  You just need to listen regularly.

The truth is also that emotions make things more complex than we care to admit. (p. 43)  We frequently seem to forget that emotions are involved in business decisions.  It affects how you interact with your boss and your co-workers, your employees and your vendors and even your customers.  Why is this important?  Because emotions DO make things more complex.

Looking at your expenses should be a simple matter of evaluating what you’re spending, is it more than you’re making and where can you prioritize and maybe save some money.  Sounds simple but then emotions come into play.  Suddenly (and I know this from personal experience), expenses that might be eliminated are “needed” because we like the vendor’s rep, or we don’t like the less-expensive competitor, or because we just like having multi-pasteurized, super-filtered, refrigerated, bubbly water trucked in daily.  It’s important to recognize these feelings when making these determinations and perhaps have an uninterested party review them with you.

The same is true on the income side.  Perhaps there is an exciting new service that you can add on and create some great new revenue without significant costs, but you don’t really like doing it.  Is that good business?  Sometimes, but sometimes not.  Either way, you need to be honest with yourself that you’re making an emotional business decision and not just a business decision.

It’s especially easy to not repeatedly do the simple things…” (p. 46)  He goes on to discuss how we are programmed to look for the “atom bomb approach”.  He reminds us that by doing the simple, repetitive things every day, we build our success.  Again, he’s talking specifically to multi-level marketers, but it’s applicable to “main street” as well.

Your customers or clients come to you for a particular reason.  In order to build on your success, it’s critical for you to determine what that reason is and make sure you duplicate it, day in and day out.  While that may not be exciting, it is profitable.  Michael Gerber in The E-Myth, points to the fact that McDonalds make billions every year by producing their hamburgers and french fries the same way, in every location, every visit.  Their success is built on that predictability.  If they weren’t consistent, they would lose business.  The same is true for your business.

Not only do you need to identify what specific items, interactions or systems draw your customers to you, you need to institutionalize them.  They need to be presented to your customers the same way, every day, by every member of your team.  This is how you build upon your success and grow your business.

If you need help working on some of the ideas presented here, please contact us.

Quotes taken from, Get In The Game, by Justin Harrison, 2014, MyOilBusiness.

Trust but Verify

This phrase, based on an old Russian proverb, was famously used by President Ronald Reagan when signing the INF treaty with Mikhail Gorbachev in 1987.  While it is more poetic than logical, it is somewhat representative of how you should approach the professionals that assist you in running your business.  Unless you want to spend time getting a law degree or MBA in tax accounting, the easiest (and most immediately beneficial) professional to apply this phrase to is your bookkeeper.  Here are some basics that you should know:

Know whether you file using accrual or cash accounting. This will make a difference in how you read financial statements such as your Profit/Loss and Balance Sheets.  If you have reports printed in an accrual format, you will see the all of the financial information available, now and “future” (outstanding bills and invoices).  This will be good to help you forecast what’s coming up in terms of income and expense and see where you might be when it all shakes out.  It will, however, include things like invoices to clients that are dramatically late in paying you and will thus inflate your profit/income portion.

A cash report, on the other hand, is basically a report that gives you an overview of how much you’ve actually received (regardless of how much you’ve invoiced) and how much you’ve actually paid out (not including upcoming bills 0r bills that you are “holding on to for a day or two”).  This will be a more accurate picture of what has actually happened so far this year.

Recognize that these statements are vital to your day-to-day understanding of your business.  Many business owners tell me that they “don’t care what’s on the P/L because that’s my accountant’s problem.”  Nothing could be further from the truth.  The Profit/Loss statement is something that every business owner should be reviewing every week (if not daily – depending upon business volume).   This document is where the business is telling its owner what is happening.  It tells the owner how much money is being made and where it’s coming from.  It tells the owner how much is being spent and where it’s going.

If you wait until the end of the year to find out that you spent more on materials and subcontractors than you took in from all of your sales, then it’s too late to make mid-course corrections to improve your profit margin.  The P/L is also where you look to watch for unnecessary expenses or expenses that are out of control.  A regular review of the P/L will alert you to the fact that your “promotional” price for your internet service has suddenly ended and needs to be renegotiated because your Phone/Internet line item suddenly spikes.  It’s also the place to see whether your last advertised offer was working because you’d see a spike in income, but the discount and distribution cost of the advertisement cost more than the offer brought it.  All of this would be missed if the business owner didn’t review the P/L on a regular basis.

Bookkeepers are people too.  Bookkeepers work hard to make sure that your financial transactions are recorded correctly and attributed to the right place, however, they can make mistakes.  Sometimes a mistake comes because the business owner fails to correctly inform the bookkeeper of where certain income is coming from or where certain expenses are being charged to.  Other times, it can be just a simple keying error that puts a transaction in the wrong place.

Either way, failing to review the financial statements on a weekly (or daily) basis, leaves open the possibility of missing such a mistake and then it can get lost unless a thorough audit is done.  At that point, it can cause headaches if taxes were filed based on the incorrect information or even worse, business decisions were made on the incorrect information and the problems were compounded.  A regular review of the financials will help to catch these occasional problems and, through discussion, correct them and help to prevent them in the future.

All of this is to say that you, as a business owner, should have a basic understanding of what your financial statements are telling you and you should be reviewing them on a regular basis — not just at year-end or tax time.  If your bookkeeper doesn’t want to go over them and explain your numbers or answer your questions, it’s time for a new bookkeeper.

If you need further help or want to learn more about what your financial statements tell you about your business, please contact us.