If you’re like most entrepreneurs, you’ll spend like a kid in a candy store on training courses designed to teach every aspect of how to make money. You can pay to get trained on Facebook ads, stock and options trading, how to make great videos, how to build online courses, how to write great blog posts, and a plethora of other subjects.
Heck, I’ve done it.
So, you spend and you create and you spend and you create and then (breathe…) you sell.
And gosh darn it, you make money!
So you dig in and do it again, and you’re working hard and selling and rinse and repeat, but every once in a while you glance in your personal bank accounts and wonder where all the money is.
What’s missing here?
We’re all so focused on making money and selling that we forget to focus on the other half of financial success: turning all of the selling into profits that we then make into personal wealth.
So what is the key to the alchemy of business success?
Pretty simple really: you just have to manage it.
Yes, it is one more thing to pay attention to, and it’s a thing that has nothing to do with whatever you do well—be that marketing and branding, home remodels or custom art work.
But it’s the key to everything you want from your business.
Too many business owners put their head in the sand when it comes to knowing their numbers.
When you know your numbers, you’re more in control, and you have the ability to set and meet your big exciting goals
And managing the numbers can be a lot easier than you think! I use simple checklists. I help my students set up a financial dashboard where they watch their key metrics. You can see easily the monthly and quarterly goal numbers that keep you focused and motivated and empowered.
We’re looking for the critical numbers that are customized to your business that are your performance indicators and once you know those you can read the health of your business in an instant.
You spend a lot of time doing planning for your business, doesn’t it make sense that you should spend an equal amount of time planning for your money?
The Numbers You Need to Know
Direct Costs = promotion-related costs. Facebook ads, Google ads, program brochures, travel costs to a trade show where you are selling something, lunch with a prospect (but only if you ask for the sale).
Pure Expenses = all of your other costs. Employee and contractor wages, office space, office supplies, legal fees, general marketing, website design and maintenance, etc.
ROI = Return on Investment. You can’t make money without spending money, but your job as a CEO is to make sure there is more money coming in than going out. If you spent $100 on Facebook ads and generate $150 in sales, that’s a 50% ROI. That’s a great ROI, but you have to make enough ROI in your promotions to pay for the pure expenses in your business (office space, cell phone, Internet, office supplies, etc.)
Revenue = All sales and income. The biggest income number. It’s useless to know Revenue without knowing Profit.
Profit = why you are in business. Profit is the golden ticket to an amazing lifestyle—profit should be top of mind for you always.
Calculate Profit This Way
Profit from a Promotion: (calculate after the promotion) = Revenue – Direct Costs – Expenses
Company Profit: (calculate quarterly and annually) = Revenue – Direct Costs – Expenses
Static Numbers to Know:
- What was last year’s revenue?
- What was last year’s profit?
- What did you pay yourself last year?
- How much did you save last year in personal accounts (not business accounts)?
- You must know your break-even point: that’s the amount of revenue you need to bring in or price you need to charge in order to generate a profit. Businesses that don’t exceed their break even point are not sustainable.
Once you know these numbers, they are your benchmarks. It’s your job to make them bigger each year. For businesses that are dramatically affected by economic cycles, you may not be able to grow them every year, in fact, you may find that your company revenues ebb and flow with the economy in ways that don’t make you happy. You have the opportunity to create lines of business that are non-cyclical—something people buy whether times are good or bad.
Ongoing Numbers to Track and Grow:
- Track revenue and profit numbers quarter over quarter (Q3 versus Q2, etc.) and year over year (2014 versus 2013, etc.).
- For businesses that are seasonal, track season over season. For example, if you sell a lot at the holidays, track Q4 2013 over Q4 2014.
- For businesses that have a consistent or periodic promotion, track promotion over promotion. An example of this is if you launch a virtual training course 3 times in a year.
- Track direct costs, such as advertising a sale, the cost to rent a room where you’ll run a seminar and make a sales pitch, etc. This is the only way to know if those efforts are providing ROI.
Once you set benchmarks for these numbers, you, as the CEO, are finally at the helm. You can grow profits consistently by tweaking each aspect of the funnel.
If last year’s holiday promotion produced $100,000 of profit, set a goal to increase that profit number by 25% each year. You can tweak the related inputs to manage to that number carefully because you have all of last year’s numbers in front of you.
That’s it! Keep it high level and be ruthless about profits.
➢ Check your bank accounts every day. All of them: business and personal. But do NOT make management decisions by the balance in your business bank account! You check your bank accounts so you can ensure the money that is coming out is for charges you approved.
➢ You need a bookkeeper and an accounting tool like QuickBooks. Downloading and categorizing expenses isn’t good use of your time. If you find someone who works virtually, consider looking for someone who doesn’t live in a big city. That way, you don’t have to subsidize the high cost of living. This tip alone will save you lots of $$$!
– CRITICAL: After hiring a bookkeeper there MUST be a checks and balances system in place to monitor the bookkeeper. For example, not allowing them access to sign checks or pay bills or having a separate person reconcile the accounts. Checking the bank account daily will help, but there must be another system in place.
➢ Automating profit and income means paying yourself FIRST and setting aside profits at the beginning of the quarter. If you relegate owner income and profits to “whatever’s left over”, that’s nearly always nothing. Parkinson’s Law says that the demand upon a resource tends to expand to match the supply of the resource. This means your expenses will rise to match revenues unless you commit to automating your profit.
➢ SUPER Pro Tip: This is how you become a millionaire CEO: Track the actions you take to produce sales. Sales calls, meetings, ads, speaking gigs, etc. and track your effectiveness at those activities. You can create a funnel that shows how revenue gets produced, know your conversion rates, and tweak each aspect of the funnel for effectiveness.
Spent $100 on ads for seminar ==> Got 25 people to attend ==> 5 people purchased ==> $1000 in revenue ==> $200 room cost + 3 hours of your time to prepare (if your billing rate is $100/hour that’s $300 in implicit costs) ==> $400 in profit
You can tweak each aspect of the funnel: make the ad more effective and get more butts in seats, make your sales pitch more effective and get more sales, get the room for less cost and profits go up. You can see that there are lots of ways to increase profits when you track each part of the funnel!
Had some insights about your business? Let’s keep the conversation going! Join us in the Profit Boss® Facebook group by clicking here, if you’re not already a member click “Request to Join”, and let me know what your most profitable product or service is and what you see that you can do to increase those profits!