Your sales are through the roof, where is the profit?
I am constantly amazed at the number of 7-figure businesses that still struggle to show a healthy profit. There are even companies with billions in sales that have yet to turn a profit. I bet you could name a few of those tech giants. I went on a quest to learn how to increase profits!
You probably spent it!
Most business owners are not accountants and they spend their time on the part of the business they love doing. The accounting reports they get months later are historical and don't provide insight for the next steps forward. Unfortunately, their accountants are more focused on doing taxes than making profit.
In the book Profit, Mike Michalowicz first figured out what was wrong and how to solve the problem. The GAAP (Generally Accepted Accounting Principles) formula for determining a business's profit is Sales - Expenses = Profits. The problem is that profit comes last in the formula, it's a leftover!
Most business owners find out what their profits are at tax time. The accountant says, "Congratulations you made a profit, now here is what you owe in taxes. The business owner invariably asks, where is that profit and how can I afford those taxes? The accountant laughs and tells them it's just a paper profit, you spent the cash.
Mike decided there has to be a better way, so he flipped the formula to:
Sales - Profits = Expenses
Now, profits come first and you take hold of them immediately. While the formulas are mathematically the same, the shift in mindset is to take profit first and cut spending. This is the reason most business owners struggle, they spend more than they should!
The principle behind this is "Parkinson's Law." Which states that we use up all the resources allocated to a job. As a business owner, you use up all the time and money you are given. However, when you take profit first, you are left with less dollars and you become more resourceful. It's like going on a diet and using a smaller plate to eat less.
I know you are thinking, I'm not profitable now, how is this going work? Baby steps!
Most businesses easily waste 10% in spending. Let's start small with just 1%. Surely you won't miss a $1 out of $100?
Open up a separate account every month and put 1% of your sales into this separate account. Now you have taken your profit first! Over time you can increase your profit percentage by 1% each quarter.
The next principle is the "Pareto Principle" or the "80/20 rule." This states that 20% of your efforts or spending provide 80% of the results. Go through your spending and find the items that are not serving you and cut that spending. As business owners, this is not something we normally do. I am sure we can agree that you have some vanity spending in your business that's not adding to the bottom line. Let's start cutting that and increasing our profits!
The last principle is to give every dollar a job. I am sure you are familiar with the envelope system in personal finance. You take your pay and you divide it into envelopes with a stated purpose (food, rent, utilities, tithing, etc.) When the money is gone you stop spending! The genius of this plan, is that you have covered your basic needs upfront. We can do the same in our business. We already have the profit account, now we add our pay account (because we deserve to paid first), a tax account, and an operating expenses account. On a regular basis, we look at our income account (the one all our sales go into) and divide up the money into profit, owners pay, tax, and operating expenses. Over time we increase the amounts in profit and owners pay, so that we keep more of what we sell.
I know this sounds so simple, but the reality is that doing simple is really hard. However, by giving your dollars a purpose, you learn to spend less and you ensure that you get paid, taxes are covered and your business is profitable.
Rocky serves as Chief Profitability Officer for business owners, teaching them how to ensure they get paid and they make profit a priority! Rocky started with nothing when his parents immigrated to the U.S. when he was two years old in pursuit of the American dream. Rocky loves to share his journey and inspire others to achieve their dreams even faster than he did. You can find him at: