A new formula that companies can follow in pursuit of profit

Angie Noll owns it Reconciled solutions. She is a Certified Profit First Advisor and holds an MBA from Loyola (Chicago).

It pains me to say that in today’s small business community approx 80% of small businesses in the U.S. go bankrupt after a year, according to data from the Bureau of Labor Statistics (through Investopedia). Such a shockingly high percentage of small businesses have failed to run a sustainably profitable business. This is rather sad: it means that many entrepreneurs are probably living on leftovers and unable to ensure a minimum standard of living.

It’s often not their fault. They had the tenacity to start a business in this entrepreneurial world. But many of them have probably listened to the age-old success formula that has been passed down from accountant to accountant for generations.

Sales minus costs equals profit

In 2014, Mike Michalowicz came along and published the book Profit First: Transform your business from a money-guzzling monster into a money-guzzling machine. In the book, Mike clearly explains that it’s not an entrepreneur’s fault if he doesn’t make a profit. He argues that we need to flip the generally accepted accounting principle for profit.

Sales minus profit equals costs

I have been a Profit First Professional for almost six years. (Profit First Professionals are dues-paying members of the Profit First organization who have completed a certification process in Profit First. I work directly with clients to implement and manage Profit First.) I am privileged to have helped countless small businesses manage their finances. transform.

The most important part of this formula is that you have a minimum personal income to meet your basic needs. Then you can adjust your expectations according to the rest of the money available. It’s a granny envelope type behavior system. If there isn’t enough money in the grocery envelope to buy grass-fed Kobe steak, Grandma buys beans and rice instead. Her relatives will still have full bellies.

We can apply the same lesson to our small businesses. If, after paying yourself a reasonable salary, you don’t have enough money to pay for your Tesla Model S, you may be able to drive a Ford Focus instead. Humans are creatures of habit. By switching the order of our payments around and paying ourselves first instead of last, we use our habits as a strategy to spend less.

The obsession with tax savings

Have you ever heard small business owners talk about how to save money on taxes or looking for extra “depreciation” before filing taxes? I hear about it all the time. People repeat it like a battle cry ad infinitum: our customers want to pay less tax. But the truth is that I ask my clients to pay more taxes, not less.

Dodging taxes is not the rallying cry I hope for my clients. Of course I don’t want them to pay too much tax. But if you incur high costs and miss out on profits, you are literally robbing your own piggy bank. There is a relentless obsession in the small business community with saving money on taxes. To pay less tax, many people think they need to spend more on depreciation that is not necessary for business efficiency. But what if, instead of spending more in your business to avoid taxation, you put together a powerful team of professionals (a great bookkeeper, a tax preparer, a good tech who can help you streamline, and a great financial planner) to name a few. a few key players) that can help you develop strategies to help you achieve great efficiency and minimize your profitability? (Full disclosure: My company offers some of these services just like others.)

Changing the entrepreneurial battle cry

As a community of small business owners, can we change the rallying cry we’ve become so accustomed to? Instead of bragging about how we escaped the IRS, maybe we should start bragging about all the strategies we’ve implemented to pursue profit.

So how do you get started with a Profit First approach? Start with what Profit First Professionals call “small plates.” Money goes into your main income account, and that account acts as a tray from which you spread money among other “small plates” at set intervals. Each account has a different purpose. The basic accounts you need to begin this process are income, profit, owner’s compensation, taxes, and operating expenses. Advanced users usually have extra “plates”, but setting up these basic accounts is a great place to start.

Next, you need to start allocating money based on the percentages you set for yourself. Allocate first, then pay your bills. In a Profit First model, money moves from your income account to your profit account and then to owner’s compensation. Then it has to go to taxes and finally to operating expenses. If you don’t have enough money to cover all your expenses after you’ve filled the other “plates,” that’s a sign you need to cut something.

A few tips to get you started: You will probably initially be tempted to take “extra” money out of your profit account to cover expenses. Set up mechanisms to make it more difficult to access that money and hold yourself accountable. “Borrowing” from yourself will only create more problems over time, so it’s helpful to get rid of the temptation. Finally, get into a rhythm. Establishing a schedule and sticking to assigning and paying bills the same number of times each month will help you build a routine and it can also provide a clear picture of your cash flow.

This new equation, “revenue minus profit equals cost,” could support the next generation of entrepreneurs in their disruption efforts.

The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.

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