Week 10 – Profit First: Gaining Clarity Through Simplicity
9 MIN READ
If you are like most of the small businesses owner we work with, when you hear accounting, you think of long complicated reports and spreadsheets filled with confusing terms. This makes the the process of reviewing and managing our books feel like quite the chore. And we all know what happens when we don’t like to do something? You guessed it. We just don’t do it.
This process of ignoring our books until the last possible second can be causing detrimental effects to your business. How much money could you have saved if you found those useless expenditures 6 months earlier? How much more income could you have made, if only you found out that your marketing plan was working 3 months earlier?
So how can you make your finances simpler so that you don’t have to always rely on reading financial statements to know how you are doing? That is one of the many benefits of implementing Profit First in your business.
Profit First transforms your bank account from just a place to store cash into a system that gives you many of the same insights as a Statement of Cash Flows without all the hard to understand accounting jargon. Now instead you can review your bank account activity and easily see where you are spending your money, where your income is coming from, how much you are paying yourself and most importantly how much Profit you are generating.
You can set benchmarks for how much money you should be collecting prior to your allocations so that you easily know if you are going to meet your goals. Using Profit First, if you know that by the 10th of the month you should have collected $10,000 and there is only $5,000 you immediately know there is a problem that needs to be addressed. You no longer have to wait until the end of the month or the quarter to review your financial statements with your accountant to find out.
Now you can quickly make adjustments to get yourself back on track so that you do meet those quarterly goals you have set out for yourself. Because there is nothing more discouraging than to work hard all quarter only to be told by your accountant that you didn’t meet your goal and you had no idea!
The same can be said for the opposite. What if you log into your bank account and instead of $10,000 you have $15,000. Wouldn’t you want to know as soon as possible so that you can make sure you can document what make the jump in income and continue to replicate it? Maybe a Facebook ad you are running is bringing in a bunch of new clients because now people in your area know you exist. You will want to continue to run that ad to build up your business. Without that financial information to support the success of the campaign you may have turned it off too soon and lost potential revenue.
“A great business is built through a true knowledge of your accounts.”
Financial Reviews Made Simple
Now when you are reviewing your finances, the questions you have will be simple; Is there money being allocated to my accounts to meet my goals or cover my expenses in each account? Hopefully the answer is yes. But if the answer is no or just barely, your accounts giving you a warning sign that you need to reevaluate your current business.
It is really important as a business owner to have financial information in a timely fashion. That is an area that the current financial model really struggles to deliver. Often times, we get the information too late or it is incomplete, which makes it really difficult as a business owner to know how to proceed. In the example, above, it is too late to know in June that you didn’t meet your first quarter goals. Now you have gone through almost the entire second quarter repeating the same issues as the first quarter.
Instead, if you were using Profit First, you would have known almost immediately that there was a drop in income being collected in the bank and you can handle the issue immediately. Maybe the dip in income collected was because clients are paying for their services and you need to work on getting better at collections. Maybe there was a reduction in clients buying your services, so you need to advertise to get more new clients into your business.
Whatever the change, with Profit First you, the business owner, will know as soon as it happens not months and months in the future. You will be able to react and make adjustments to your business now so that you don’t continue to miss your goals.
Focusing on Profits not Expenses
We have talked about this before, but one of the benefits of Profit First is that in focusing on Profits rather than expenses, you are focusing on how you can keep more money in your business rather than how can you spend more money. This shift in focus will bring clarity to making decisions for the future of your business.
Under the traditional accounting formula: Sales – Expenses = Profits, your focus is put on expenses which leads to spending with little regard to what remains. We have heard so many stories of businesses that make $10,000 in revenue per month but then spent $8,500 on expenses per month. They are meeting their revenue goal, but they are keeping very little of it in the business as a reward to the owner or a safety net for the future.
When you focus on expenses, the solution is often, what other product can I buy in order to make more revenue.
However, when you start to focus on Profits, you start to think what can I do to be more efficient or innovative in my business to deliver more Profits. Often times this leads business owners to be selective in the services being offered or rely more heavily on technology available. The biggest eater of Profits is chaos and inefficiencies. The smoother your business operates the more Profit it will produce.
Knowledge is Powerful
The sooner you know of potential issues, the sooner you can fix them. By eliminating the complicated financial review process and implementing bank account reviews on a regular basis, you will have the information you need to make changes. You will start by paying for only the operating expenses that you actually need. Even if your revenue stays exactly the same, maybe even going up, you will start generating more profits! Which means that you will be rewarded for the hard work and dedication you have put into your business.
Profit First provides clarity within a matter of minutes that would have taken hours to figure out before when you were running countless accounting reports you didn’t understand.
Since Profit First is focused on creating and growing profits by managing your existing revenue rather than requiring you to grow your business, it can be implemented in any business whether a brand new startup or a well established business.
After all Profit First is about bringing clarity to your business’s finances and transforming your business from a cash-eating monster to a money-making machine.
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