Despite what Peggy Sue said in her Algebra class in the 1986 movie, “Peggy Sue Got Married”, we do use what we learned in high school all the time. One of those things is the Commutative Property which tells us that a+b+c = a+c+b.
What does that mean to you? Well look at this equation which all small business owners live by. Income – Expenses = Profit
The Commutative Property tells us that we can also express that equation in a slightly different way that has HUGE implications for the average small business owner. Income – Profit = Expenses
Although it may not seem like a big deal, if you really look at it, this can change the whole way that you run your business. The first equation has you taking out your expenses and then using whatever is leftover to pay yourself some profit while the second equation has you taking out a portion of your income as your profit and then using what is left over to pay your expenses. The advantage to using the second equation is that you are guaranteed to take money home as profit instead of waiting until everyone else gets their take before you do.
Using the second formula encourages you to reevaluate how you are spending the money that is not directly tied to sales (Operating Expenses) like administrative salaries, rent, utilities, office supplies, etc. Studies have shown that when forced to, most companies can easily reduce these expenses by 10% without even noticing. The problem with most small businesses is, by using the first formula, they are never really forced to examine those expenses, never really forced to reduce them by 10% and thus, never really forced to produce a profit for their owners……YOU.
For more information on how Profit First can help you make money on each transaction, contact us today.