Profit is a choice: Are you making the right decisions?
“My profit and loss statement says I have a profit of $4,000. So how come I have 50 bucks in the bank?”
Fundamental truth: Your bank balance will never tell you if you’re profitable or not.
Profitability: It can feel so elusive to us business owners at times, right? Part of the reason why it may feel that way is that profit isn’t a tangible thing and we’re spending money on a number of things that are. It’s easy (and necessary) to spend, but we don’t always connect spending to profit. However, this can be why profit seems to feel just out of reach. At Officeheads, we find that business owners don’t often get reliable reports or know how to read them accurately or effectively use them. In other words, unless you’re truly on top of your numbers, you may never be able to fully understand whether you’re operating at a profit, break-even or at a loss.
Let’s dig deeper into the financial story of your business to get a true sense of profitability, so you can see how it is within your grasp.
Think of profit as your “trophy” at the end of the day. Your revenue can cover your expenses and you’ve hopefully made sound choices to ensure that you have money left over after those expenses. That’s, of course, profit. If you have the opportunity to make decisions on what to do with that profit, guess what? It doesn’t feel so elusive anymore!
After all, you have to first know whether you’re actually profitable or not. If you’re only looking at financial reports three months from now (or gasp – only once a year for tax purposes!), it’s harder to make decisions to be profitable because the money has already been spent due to cash flow. So it’s vital to be very purposeful in understanding what your profit is and how you want to use it exactly. When you have this view of profit, it will feel far more “real” to you.
Finding your purpose in profit
What does it mean to be “purposeful” when it comes to your profit? Take a few steps back and think about your business and exactly how you are spending. If you get caught up in the hustle and bustle of your day-to-day, you most likely spend money on what you feel you “need” or want at the time. On the other hand, if you bulk your purchasing decisions together and become more purposeful in how you are spending your profit and identifying it in that way, you start to make more strategic decisions.
Here are the ways in which you can spend your profit (and possibly even make some). Be sure to choose wisely:
Profit decision #1: Your cost of goods
Are you spending the least amount of money to deliver your products and services at the level of quality that reflects your brand? Do you need to buy the most expensive materials or can you get by with less expensive materials? How is your staff spending their time and do they have the appropriate skill level? Mind you, it may be fine to invest in the more expensive resources if it ultimately increases your revenue and is necessary to deliver the proper quality, but recognize that this is your first purposeful choice.
Profit decision #2: Operational overhead
How much are you spending on rent? Are you taking your employees out for lunch every day – and if so, do you need to? Does your office supply closet have every imaginable color of pens? Even the smallest of choices contribute to the overall picture of how you operate your business.
Let’s not forget the other areas of your business: Are you spending enough money on your insurance? What about your HR and benefits? What’s the budget you’ve committed toward sales and marketing and is it producing ROI? How much are you spending on travel? Above all, are you spending enough or too much to get that profit trophy?
Profit decision #3: What should your profit be?
Are we talking about 1%, 5%, 10%, etc.? Understand how to analyze your historic spending so you can select a realistic profit margin, then spend accordingly so you can meet it. Even if you have to transfer that percent of all your revenue into a savings account, you should know your profit goal and operate your company accordingly. Take the time to evaluate your profit percentage every quarter. Why? Because you don’t want to wait an entire year to reflect on your performance and be able to make changes. If you’re just starting your business, it may be that your profit is 1%. But that’s OK since your money is likely being spent on building your business. That said, fast forward to years 2, 3, 4 and so on. Are we still talking about a target of 1% profitability? No. You may target 5% profitability and as a result, you can then operate with what you have left.
Are you ready to understand your financial reports, achieve your revenue goals, creating quarterly plans for the profit? If you’d like to have a true strategic partner, our team can help and hold you accountable for getting where you want to be. Book your free consultation with Officeheads.