Written by Norman Mangina
Today we’re going to teach you how to guarantee profits in your business. Why is this important? As a business owner, one of your primary goals is to make money. You took a risk to start a business and your profit is the reward for your ownership of the business. However, so many business owners struggle with making money even though they have a good business concept and skills to back them up. Where they fall short is in managing the money they have earned. If you want a financially healthy, sustainable business that funds the lifestyle that you want to live, you need to build your profit in from the onset. You must make profit a habit.
What is Profit?
Accountants call the money you make in your business a “profit.” A business uses profits to pay bonuses to its owners and employees. It may use profits to make additional investments in the business with the intent of growing the business and making more profits. Accountants define “Profit” as
Revenue – Expenses = Profit
What you bring in through sales minus what you spend equals your profit, or what’s left over. And that’s the problem with how we think of profit today.
Why is profit what’s left over? Why do we treat it like an afterthought? In his book Profit First, Mike Michalowicz explains why this thinking keeps business owners from making a profit and how putting “profit first” can actually guarantee your business makes a profit. Here’s his formula that will change the way you think of profit.
Revenue – Profit = Expenses
This formula puts profit first, before expenses. This means you take your profit out of the business BEFORE you pay any expenses. So expenses become the leftover rather than your profit.
Setting Up Your Profit System – Part 1
So how can you get started on the path to guaranteeing yourself a profit in your business?
Your “Profit” Bank Account
The first thing to do is get the right bank accounts in place. First, set up a savings account at an online bank like Ally Bank or Capital One. This will be your Profit account. Decide what percent of your sales your business should have in profit. Most small businesses should have profits margins of 10-15% of sales (after paying yourself a reasonable salary). Let’s assume you want to make 10% profits. Each time you get paid, transfer 10% of that amount to your Profit account, and don’t touch that money for regular business spending. It’s for your own personal bonuses, paying off debt or strategic investments in your business.
Your “Taxes” Bank Account
What you have left over is for expenses. That’s all you can spend in your business and all you SHOULD spend in your business if you want to actually generate a profit. But, before we spend all of this on the latest software, office supplies, travel, business entertainment, marketing, etc., we need to pay our taxes. So let’s set up one more savings account at that same bank for Taxes. Talk to your financial advisor or CPA about what your taxes may be and transfer money to your Taxes account from each sale.
Once you’re comfortable with this process, you can take this to the next level. We suggest you read the book Profit First to dive deeper into the system that will engineer profits in your business.