Many business owners are focused on the importance of growth. They want to increase sales, have more employees and bring in more overall revenue. This sounds like a great idea. Unfortunately, business growth sometimes comes at the expense of profitability. This is why the Profit First method by Mike Michalowicz is so intriguing.
If you’ve been following the Illumination Wealth Blog, you may have seen my previous articles about this topic:
Ultimately, the Profit First method boils down to putting profit ahead of other business priorities, such as expenses and, yes, growth. This approach has been working for many business owners to ensure profitability during the early years while maintaining excellent profitability during periods of growth. It can be an effective short-term and long-term solution. A focus on growth is a long-term approach and can often make it difficult to be profitable until you reach those bigger revenue goals.
Nothing. It’s something almost all business owners should be striving for over time. As many entrepreneurs quickly find out, growing a business isn’t that easy. What happens is you focus so much effort and financial resources on increasing sales. The revenue may go up, but so will costs. You have to invest in new technology, hire additional staff, etc. It’s true when they say “you have to spend more to make more.” Business growth could ultimately come at the expense of profitability.
Plus, there is the long-term thinking. You are always looking forward at future sales and revenue goals. That goal may drive you to keep growing and you may eventually reach it. What many businesses forget to ask when setting the goal is how much it will cost to get there.
Let’s say you are currently doing $1 million in sales and struggling to make profits year after year. You are investing everything you get back into the company to spur your business growth for the coming years, with an ultimate goal of reaching $10 million sales within five years. Are you really making profit if all that money is going back into the business? What will your profits actually look like when you reach the $10 million revenue mark? Odds are if you are struggling now, you will still be struggling to be profitable then. The business growth is measurable with more sales, but your profitability is even more difficult as you get bigger and the company is much more expensive to operate.
Of course, every business is different, so profitability and growth goals will all be relative. This is just a common example of how it often looks when entrepreneurs prioritize growth over profit.
The Profit First method puts profit first, as the name would imply. In essence, you are growing through profit—not the other way around. Profit First revamps your cash flow system and ensures a certain percentage of each sale goes into a profit account, as well as the business owner’s compensation. The profit is already covered and it’s there to reinvest in the business as you find the right opportunities. This enables you to grow naturally without spending too much and putting your business at risk. The profitability will always be there as you continue to grow. You just aren’t throwing every bit of money earned right back into the business. You are compensated properly. Your profit account is healthy and accessible when needed.
It can be difficult to change to a Profit First mindset when you have a growth-first mentality. And, this system may not be ideal for all entrepreneurs. However, it is an idea worth looking at if you are starting a new business or if your business is failing to grow while surviving on thin margins—or taking losses.
To learn more about Profit First and to develop an effective business plan for your short-term and long-term success, contact Illumination Wealth today and talk with one of our experienced business advisors.