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As a business owner, my company needs to be profitable. It needs to cover payroll to ensure the livelihoods of my team members. More importantly, it needs to be profitable so we can fund our growth.
Profit makes the hard work worthwhile. Profit is the Return On Investment (ROI). In so many ways, profit is your return on risk. Profit is how you win the business game.
On the flip side, losing money (negative profit), even if it’s just for a month or so, creates stress.
If the losses continue to the point where you can’t keep current on expenses, the stress can become unbearable. Credit cards max out. You can’t take a paycheck. I call this the “fiery pit of hell.”
In business, winning makes you feel great. Losing makes you feel bad, and eventually, beats you up as your business gets deeper in the financial hole.
For the reasons just stated, creating profit is as essential to your wellbeing as an owner and leader. I want to share my top five disciplines that create profit and the top five behaviors that kill profit.
Top Five Disciplines that Create Profit
Why label them disciplines? The answer is simple. To achieve that 10%, 15% or 20% Net Profit, you have to control 80% to 90% of your expenses — especially payroll. Financial disciplines are a non-negotiable.
Profit is planned: In coaching, the hardest discipline we teach is creating and living a Cash-Flow Plan (CFP). The CFP tells you what you need to hit in revenues and your budget for expenses. It sure sounds basic, but the disconnect between creating a plan and living that plan is where the damage is done. The entrepreneurial spirit is known for risk taking. It’s also known for flying by the seat of its pants. KEY: If you’re committed to creating Profit, you must be committed to creating a Cash-Flow Plan. It’s a discipline that cannot be compromised.
Spending means “living” your CFP: Creating a Cash Flow Plan is the easy part. To “live” your CFP is where financial discipline comes in. What good is it to set a monthly service and retail goal without engaging every member of your team through daily huddles and scoreboards that tell if you’re ahead or behind? Next, what good is it to budget expenses if you don’t consult your CFP before making a “spend” decision? KEY: Failure to “live” your CFP each and every day means you’re counting on luck to create profit. Luck doesn’t create Profit. Living your CFP does. It’s a discipline that cannot be compromised.
Financials tell you the truth — and you listen: Perhaps the reason some owners are so uncomfortable with financial reports is not because they don’t like numbers, it’s that financial reports tell the truth. Your Profit & Loss Statement (how the business is performing). Your Balance Sheet tells you what your business owns (Assets), what it owes (Liabilities), and what it’s worth (Equity). Together, these reports tell the truth. The only time your financial reports cannot tell the truth is when you play games like not reporting all income or running personal expenses through your company. KEY: Accurate and timely financial reports exist to help you make the absolute best decisions for your company to not only create Profit, but how to wisely use that Profit. It’s a discipline that cannot be compromised.
Minimal debt or debt free: Debt is financial drag. The more debt your company has (credit cards and loans), the harder it is to turn Profit into cash. Remember that Profit isn’t all cash. When you can’t pay bills within 30 days, it means your Accounts Payable (debt) is killing Profit. KEY: Manageable debt means using a portion of Profit to pay principle and the ability to build cash reserves. It’s a discipline that cannot be compromised.
Protecting profit is embedded in your culture: At Strategies, we practice what we preach. We (meaning multiple sets of eyes) review our financial reports weekly which allows us to spot subtle changes that may require attention. A weekly review takes only a few minutes. If we like what we see, we smile and move on. If we spot a number that’s moving in the wrong direction, we dig deeper and make the necessary decisions. KEY: We protect our Net Profit and we fanatically build and protect our cash reserves. This is all second nature to us. Every business owner must do the same. It’s a discipline that cannot be compromised.
Top Five Behaviors that Kill Profit
Failure to plan for Profit: This is your company. You are the leader. Your personal guarantee is on the lease, loans and leases. Your family’s wellbeing is on the line. Your life balance and wellbeing is on the line. Your employee’s livelihoods are on the line. Your reputation is on the line. There is no acceptable excuse to not plan for Profit. If you don’t know how, begin the coaching process.
Don’t understand your financial reports: Why not? A Profit & Loss Statement is dollars in, dollars out and dollars left. If you spend more than you bring in, you’re in trouble. A Balance Sheet is Assets, Liabilities and Equity. If your Liabilities exceed your Assets, your Equity goes negative and you’re in trouble. To succeed in business, you must create Profit. Not understanding your financial reports kills Profit because you have no way to control it.
Failure to control payroll costs: In a salon/spa, service payroll will always be your largest expense. Payroll will always be the elephant in the living room expense. Your method of pay doesn’t matter. When payroll costs become unsustainable, you must take decisive action.
Uncontrolled spending: Entrepreneurs can find a way to justify any purchase or expense. Without the discipline of creating and living a Cash-Flow Plan, uncontrolled spending will kill Profit.
Unreported income and personal expenses: If you think taking cash out of your company to avoid paying income tax is clever, think again. If the income number at the top of your Profit & Loss Statement is a “fake” number — you’re entire Profit & Loss Statement is fake. Using your company checkbook to pay personal expenses means your Profit & Loss Statement is essentially garbage. Not to mention the liability you’re exposed to should IRS decide to audit your company. They know how to find every game owners play.
So there you have my top five disciplines for creating Profit and the five behaviors that kill Profit.
Here’s my challenge to you: First, if any of the five behaviors that kill Profit describe you or your company, the clock is ticking. The easiest way to fix behaviors one through four is to go to www.strategies.com and sign up for free coaching session.
If behavior #5 describes you, it’s time to clean up your act and learn how to create Profit the smart, and right, way.
Lastly, if any of the five disciplines that create Profit is a challenge for you, Strategies can help. This is not an attempt to sell you coaching. It is simply something we are very good at and can help you master the disciplines that create Profit.