I don’t care how much revenue you’re bringing in, if you’re not profitable, then all you own is your job… or an expensive hobby.
Revenue obsession is at the very core of something that has puzzled me for decades. Because revenue alone does not tell even close to the whole picture of the health of a business. Is revenue important? Of course it is! But is revenue the most important factor in the success of your business? Nope. Not by a long shot.
The chances are high that you, like many of my readers, started your business to earn more money and be in control of your own destiny. Or, at least, that was the idea. Instead many business owners end up just owning their job, and they’re not even being rewarded for the hassle that comes with it.
If you’re tired of working hard in your business, barely scraping by on meager wages, and having little else to show for your efforts, then it’s time to demystify profitability.
A tale of two “profits”
First, we need to define our terms, because the Internal Revenue Service and traditional accounting methods define “profit” a bit differently than the thing we’re actually after as business owners.
In the simplest terms, the IRS and accounting methods define profit as money left over after expenses. There are plenty of nuances to muddy the water, but this definition will serve us well for today.
prof·it
according to traditional accounting
the money left over after subtracting expenses from revenues
But here’s the catch: your wages as an employee of the company do not generally get counted as expenses (depending on your business structure). Anything you pay yourself is typically treated as profit. And taxed accordingly. All of this makes sense from an accounting perspective because we do need to pay taxes on our wages. Since you’re likely the sole proprietor in your business, your compensation is handled differently from any employees you have on payroll - you’re probably not automatically withholding payroll taxes on yourself. And all of this introduces a big problem, because it fundamentally ignores how our brains think about profit.
Humans (as opposed to the GAAP handbook) think about profit as the money paid out above and beyond our working wages. And why would we think of it differently? If all we ever take home is our salary as an employee of the business, all we have accomplished is owning our job - and probably getting paid less than you would somewhere else for it by the time you factor in payroll taxes and potential benefits.
prof·it
according to humans
the extra money you keep above and beyond owners' wages for working in the business
But here’s the thing: not many business owners actually realize profit the way humans think of it.
Change the way you account for profit
Many of you have probably had the experience of showing a “profit” (according to your accountant) at the end of the year… and then asking the question, “So… where is all of that profit?”
It’s gone. All gone.
Now, full disclosure: I cannot claim all of this thinking as original thought. Mike Michalowicz formalizes and develops this line of thinking in his book Profit First, which I highly recommend reading. But here’s the main idea - we need to think about profit differently, by taking it from our revenues first, and then forcing the business to operate on what’s left. This will fundamentally shift how you think about your business forever and will have you earning profit (the human kind) forever. And this is great news, because it naturally aligns with how we’re already wired to think about “profit”.
You deserve fair warning - as with every topic I ever write about, this is not a magic pill. Your business’ problems will not be solved overnight and keeping more of your hard-earned money will be hard work to implement.
But it will be worth it, because you’ll start to take home extra profit (the real kind) each quarter, above and beyond your working wages.
How this will make you money
Change the way you think about profit to keep more in your own pocket!
This edition isn’t about helping you to increase your revenues. While that is an important topic, this issue is all about helping you to actually keep a little bit more of that hard earned profit for yourself. And it all starts with beginning to set aside a profit for yourself before you take care of expenses.
And this works because it forces your business to keep expenses under control, leaving you enough money to take some extra home.
Your action plan
The only way you’ll actually benefit from this edition is by doing something with it.
So here are three things you should do today:
- Go grab a copy of Profit First - the audio book is engaging and hilarious
- Listen to or read the first chapter today! Seriously, it will take less than 30 minutes to complete and you’ll be excited about the future of your business by the end of the first chapter alone.
- Commit to the idea of taking profit from your business and wrestling expenses into submission with what is left.
Once you’re thinking about the profit the right way, then it’s time to focus deeply on increasing revenue.
But if you’re not profitable (the human kind) now, then you probably won’t be profitable later when you increase your revenues either.
To thriving,
Zach
PS: If you want some help implementing a new system of managing cash for profit (the human kind) in your business, I would be honored to help. This is the reason I started business coaching - to help small business owners like you keep more of your hard-earned money in your own pocket. Set up a free 30-minute discovery call with me today.
