Super Hero Method
What keeps you up at night? Is it how to make payroll or pay your sub-contractors? Or maybe it is how you are going to be in a financial position to embark on that new service offering. It comes down to management. Profit management.
I would like to suggest that there are two methods for managing profit – one not so good and one super hero good. The first, I am afraid, is the method that business owners use most often. Bank balance accounting. This is where business decisions are made based on the available cash in the bank. The advent of online banking has made this easier than ever. Login, check the balance. Then it’s either party mode or panic mode. A high balance may cause the owner to become overly optimistic and splurge on those things he might not really be able to afford over the long run. When the balance is low the owner generally doesn’t think strategically but reacts by finding ways to increase income by any means necessary. Most often this means not paying themselves. Business owners that don’t get compensated from their business activity build resentment toward the business they started and love and resentment toward their faithful employees who are getting paid. Not only that but the ideal client becomes anybody with a check book. Which can result in long term customer relationships that become cringe worthy and tedious. This is a recipe for death of a business.
A better method, that super hero method, is the one that Mike Michalowicz writes about in his book “Profit First”. This method works with human nature which is to expend a resource to the extent it is available. Like Dave Ramsey’s envelop system – Profit First uses bank accounts to pool funds for specific purposes. The “envelopes” are labeled – Income, Tax, Profit, Owner’s Pay, and Operating.
It starts with the Profit Assessment. A full evaluation and analysis of the business’s historical and current financial trends is conducted. This data is compared to successful (profitable) companies with similar gross revenue. From this information, ideal percentages are identified for the four categories of Profit, Tax, Owner’s Pay, and Operating Expense and a gentle quarterly strategy to get the business from where it is to these target percentages is rolled out. Actual dollars are allocated during the month to the various accounts or “small plates”. Putting the business on a diet. Now the amount of money the owner would see when using bank balance accounting encourages him/her to operate within the boundaries of the account balance. This drives efficiency and creativity.
Rather than getting to the end of the month to see where your business activity has been this is a proactive process to steer where your business is going. Meeting payroll or paying taxes so no longer keeping you awake because the money is there. Oh, and that “Profit” account…. that’s your ticket to real success. Pay down debt, pay yourself a bonus, start that new service line. The possibilities are endless.