A few years ago I was at a closed door meeting of business owners. We had gotten together to share information and work on our businesses.
One of the members had just crossed the $ 500,000 mark in her business. She was understandably psyched and we were for her.
Later, after dinner, we were talking and I asked her what her profit was (cheeky I know).
Her net was under $ 50,000. On $ 500,000 in revenue. And she paid herself a salary of $ 60,000 so it was not that she moved $ 300,000 to her personal savings.
Thinking back on it, my mouth must have dropped. I hope it did not, but do not see how it did not.
She then asked my net and her mouth did drop. While hers was under 10% of revenue, mine was closer to 35%.
We talked late into the night about revenue, expenses, profit, taxes, retention and much more.
The next day she hired me. Flash forward 12 months and her revenue was a little under $ 550,000 and her profit was just over 20%.
When it comes to small businesses, “profit” often seems to be “that thing we never speak about”, a secret to remain hidden, often shamefully, brought out from under the bed only during tax season.
What if your profit was public?
Would you be proud? Embarrassed?
What if you were to plan for your profit first?
Years ago I save away a revenue planning template. One where you actually plan what your profit is rather than “just let it happen”. (Hint: It almost never “just happens”.)
7 Step Revenue Planning
The planning template was simple and all about reverse engineering your revenue:
1. List all your known expenses, including your salary
2. Add in your desired profit
3. Total them
4. Multiply the total by 10-15% for unknown expenses
5. Add Numbers 3 and 4 together
6. Multiply the new total (# 5) by 30% or your tax percentage if known
7. Add Numbers 5 and 6 together. This is your revenue goal
The above works for planning, but what about day-to-day reality?
Day-to-day is simple although it requires a little more discipline to continue following the process – that said, if you do, you'll be thrilled with the results.
For every dollar of revenue that comes in, give it a home.
1. X% to your Profit
2. Y% to your “Salary”
3. Z% to your Taxes
The reminder is what's left for your expenses.
Depending on your preferences (and whether or not you can keep your fingers out of the other pots), you may wish to set up separate accounts to “house” these sums or simply move it within your bookkeeping file.
Personally I keep separate accounts (out of sight, out of mind).
Following this process:
• ensures that your business is profitable,
• ensures that you get paid,
• ensures that your taxes are paid and
• ensures that you do not spend more than your business makes.
Do not worry about what's happened in the past. Choose today to move forward. The above will help you do that even if you start small and increase over time as you reduce your expenses and, if necessary, pay down debt.
Questions? Hit reply and let me know, I'm happy to answer them.
And, if you're ready to work together on your business , you'll love our “Keep It Simple” Non-program Program designed for the business owner who is looking for a trusted partner to run things by, brainstorm with, get advice when things come up and yet does not necessarily need a set schedule of calls.
* Note that, on a personal level, I used to pay for pet insurance each month. Then I applied this same concept and created a savings account just for that – now the funds come out automatically each month and are available when I need them without the feeling of “throwing money away” when the insurance company would deny claims.