If you aren’t making money despite running a business that generates revenue, you have a problem.
You’ve probably seen the stats:
One-third (or less) of businesses will fail within a year
Over half of those businesses that do survive won’t make it to the 5-year mark
If you work in the construction, transportation, or warehousing industry, you have the worst odds of making it.
(PS For more information on these and related stats, check “What Percentage of Small Businesses Fail? (And Other Similar Stats You Need to Know)” with Fundera. )
Making Money is Not a By-Product – It’s a Goal
Right now, you might feel one of two emotions; excited because your business is beating the odds or scared because you have a business you can’t afford to run.
Years ago there was a study that said that the number one predictor of having a profitable business is setting profitability as a goal.
Enter the “Making Money” Profitability Expert: Mike Michalowicz
If you haven’t heard of Mike Michalowicz (aka “The Toilet Paper Entrepreneur”), you need to get acquainted. This best-selling author, consultant, lecturer, columnist, and former TV host has a lot to say about the simple rules of a profitable business. Many business owners assume that you need a lot of cash before you start earning a profit. Others assume that you need to spend years toiling away without profit until you hit the entrepreneurial jackpot by luck or timing.
Nothing can be further from the truth.
You can become a profitable business today, no matter where you are. If you can adopt the right approach toward yours money. If you can adopt and maintain a “profit first” mentality, your business can become profitable starting today.
Let’s get off the roller coaster of inconsistent profits.
The 5 Principles of Mike’s “Profit-First” philosophy
1. Invest in your profit first
Business owners traditionally taught to invest profits after they pay expenses, their own salary, and taxes. While this sounds logical, think about it for a minute.This is like trying to pay gas for a trip while hopping from gas station looking for change on the ground.
[tweet_box design=”default” float=”none”]If you are always chasing money after you pay everyone else, you will never have enough to reach a profit[/tweet_box]
Here’s Mike talking about profit on TEDx.
- Watch the above video
- Take a look at the profit you collected last week or month.
- Find examples of profitable business (especially in your industry). If you are able to, review (either directly or indirectly) how much money they spend on marketing, operations, and other expenses. Compare that to your business.
2. Tell your money who’s the boss
Many business owners, although they don’t like to admit it, live at the mercy of their account balance. If they have a lot of paying customers, they are great. If they don’t, their business suffers. This reality forces business owners to keep chasing sales.
This road, however, doesn’t lead to a profit. It just leads to a hamster wheel of sales, expenses, etc. If anything is left over, the owner gets a profit.
Mike Michalowicz’s advice flips the mindset. He places the emphasis on profit. If a business owner wants to earn a profit, their actions should reflect it. Pay your “profit account” first and then everything else. By doing this, business owners are putting themselves into a situation where they have to start decreasing costs and increasing the revenue of their business.
Think about it this way. If you know that some of your hard-earned money is locked away in a hard-to-access profit account, wouldn’t you do everything you could to cut out unnecessary expenses and increases your profits?
Guess what results? A more profitable business.
- Print your most recent budget and cash flow statements. Compare the differences between what you expected to spend and what you actually spent. Circle each instance. Think through what happened.
- Track your business’ expenses for one week. Match up your expenses with your expenses.
- Look forward to next week’s expected sales. Create a rule for how you plan on spending this revenue (1)if you don’t meet your revenue goal (2)if you exceed your revenue goals.
3. Stack, don’t balance your money.
Business owners have a notorious habit of “balancing” their money. If a client doesn’t pay or an unexpected expense comes up, they pull it from their profits.
This constant balancing of money keeps profits out of the reach of business owners. Instead, Mike Michalowicz is advocating that business owners use “the envelope method” or “plate method” instead of a seesaw. Michalowicz advocates creating specific accounts for “profit”, “owner’s salary”, and “expenses”. Once the money is gone from one of these accounts, using Mike’s plan, you can’t take it from another.
Action Step: Identify a monthly profit goal and create a way (either an account or an actual envelope) to meet this profit goal
4. Keep your habits steady
The biggest obstacle to profit, according to Mike Michalowicz, is our habits. One of those bad habits was mentioned above, balancing money instead of stacking it. Another bad habit is inconsistent habits. If you are going to become a profitable business owner, you need to adopt profit-generating habits. This includes collecting your profit first and making it more difficult to access your profit account than your normal expense accounts. When you put into practice the ideas that Mike is advocating, you have to do them consistently.
Action Step: Identify the habits that you need to adopt to keep a profit-first business.
5. Keep evolving for your future customer
Profitable businesses don’t sit on their laurels. They focus on where their customers are going because they will move. In this click-quick, fast-moving world, customers can leave your business within seconds. As every business owners, you can’t maintain a business without customers. So what do profitable businesses do? They prepare for it, so should you.
- Walk through your own customer service or client onboarding process.
- Connect with customers on social media, not only the current trends. Take a look at your competitors
- Identify money habits that are destroying your business. Create a plan to stop doing those habits.
Need a 2-minute summary?
- Commit to a profit-first mentality
- Track your money. Identify where your budget changed and why.
- Create new rules where profit is your first expense.
- Follow through on the rules you created in step #4.
- Keep improving your business
Recommended Online Tooks & Resources
Mike’s Twitter chat & Video with Ivana of DIY Marketers How to Make Your Business Permanently Profitable
What’s stopping you from turning your business into a profit-making machine?