Do you know how profitable your business is? To be clear, your profitability isn’t the revenue you’re bringing in or even your net income, after expenses.
One of the biggest mistakes we see business owners make is over-simplifying the profit in their business. It doesn’t have to be a complicated process, but it does take a little bit of thought.
And to actually see real profit month over month and year over year? That takes a plan.
For us, Profit First is the plan.
It allows us to take a profit every month, regardless of our revenue, because we take our profit first. The revenue matters, the net income matters, but the fact that we’re profitable means more.
We’re not going to talk about how to be more profitable here; that’s a blog post for another time.
But we are going to address why your bottom line revenue isn’t what matters when trying to grow a profitable business.
It’s easy to get excited about having a big revenue month. As bookkeepers, we know better, but we get excited too! To see a five-figure month is exciting. To hit $20k, $50k or more for the first time in a month is cause for celebration.
But once the confetti settles and the champagne goes flat, what does your bank account look like? Have you paid out all that revenue to expenses? Did you pay yourself a livable wage this month? Do you have anything left over?
Usually the answer is yes, all the money is gone. No, you didn’t pay yourself this month (again) and no, there’s really nothing left over.
So while the revenue looked and felt pretty good while it lasted, there was nothing left for profits and nothing left for you, the business owner. And our guess is that you spent much of that big month feeling pretty stressed out as you made sure the work was getting done.
Being profitable means a few things:
- You’re able to reserve a percentage of your revenue as profit each month, usually because you set it aside first.
- You’re able to plan out and/or control your expenses so you’re not spending every dollar every month.
- You have enough cash to pay yourself and your employees a living wage. Consistently.
- You enjoy a quality of life where you’re able to spend time with loved ones and enjoy some of your own hobbies. In other words, you’re not working all day, every day.
- You don’t stress out so much about revenue because you have a really good handle on your expenses–and you know where your break even point is because you hit it regularly.
Profit is so much more than your revenue and having a profitable business will help you feel more relaxed and comfortable about where your business is and where it’s going. If this feels out of reach for you, we can assure you that it’s not. It just takes a plan and some accountability.
Let us help you find the way. Book a call with us today so we can show you how.
Cash reserves in your business are what will not only keep you afloat but also ensure that you have what you need to prevent an inevitable crisis should…I don’t know, a pandemic hit.
It’s something we need to…we must talk about.
If you have a copy of “Fix This Next,” go to page 115 and read (or re-read) that section. In fact it is so powerful that I am going to include the first paragraph here:
“Desperate people do desperate things. This is not a position you want to be in. Cash will help you avoid it, and generally speaking, more cash will help you avoid it more. An adequate reserve of money enables you to navigate unforeseen circumstances with confidence. To allow business operations to continue unabated, or to take advantage of an unexpected opportunity, your business needs two to six months of your average monthly revenue reserved in a VAULT account.”
The last question on the Profit level of the Business Hierarchy of Needs is:
“Does the business have enough cash reserves to cover all expenses for three months or longer?”
Most businesses we start working with would have to answer “no,” even before the present crisis hit.
For many business owners, these are desperate times. And while we can’t change the past, we can learn some lessons in order to help us prepare better next time.
And keep the ensuing panic at bay a bit.
Trust us, there will be a next time. It may not be pandemic level, but even the normal business cycle can cause a cash crunch on our businesses. And we can’t and shouldn’t count on the government to bail us out every time.
The good news is implementing the Profit First cash management system systematically and reliably starts building this long term savings (VAULT) account, month-by-month, by creating the good cash habits your business needs. The initial goal is to be able to cover three months of Operating Expenses, and then three months of Sales Income, into that account.
You may be thinking “no way can I do that,” and frankly you need to check that thinking at the door. Instead, start thinking how life would be different if you had been working on this before 2020.
I’ll wait while you think that through.
It’s not all negative, either. Your VAULT account has two primary functions: to cover expenses in case of unexpected business disruption and to take advantage of an unexpected opportunity. Imagine having the amazing property you have had your eye on forever come up for sale cheap, and you could pay cash for it, or even just put a huge down payment on it. Or paying cash when a closing business has a fire sale on their equipment. It’s a great feeling and so worth the effort.
Now that we have had THIS talk, give me a call and let’s talk about how to set it up in your business. Click here to tell us a little about your business and schedule an appointment.
In this week’s post, we are going to be catching up with Erin Haag, whom I have known for a couple of years now. We met when Erin owned a fitness studio and she needed to implement Profit First to make her business better than ever.
Erin’s Success Story
Erin owned a pilates and yoga studio in South Florida for nine years, but prior to that she worked for a whole bunch of different companies in corporate sales. You name it, she did it! We’re talking the weight loss industry, wellness centers, nutrition, medical spas, cosmetic surgery centers, and laser hair removal. She helped make millions of dollars for other people and then she was laid off during the financial crisis of 2008.
At that time, she decided she was done making money for other people and that is when she used all of her strategies to open her pilates and yoga studio. Erin had a pretty successful business. She paid herself from day one and her business was profitable. However, about five years in, she had two kids under the age of two. She was working 50 plus hours a week and hadn’t taken a vacation, let alone a day off in forever.
The final straw for Erin was when she was hospitalized twice within four months. The first time was for a kidney stone that brought on an infection and the second was for viral meningitis. She was released from the hospital on her oldest daughter’s second birthday and she realized something had to give.
She began to make shifts within her business. She did that mostly with her pricing and by automating her systems, but she basically changed everything. When Erin and I began to work together, she went from a 4% profit margin to a 47% profit margin. She also started to pay herself a six figure income and began to work only five days a week.
Erin began to work with me about eight or nine months before she sold her studio. In that time, she saw her biggest growth. In the six months from the time she listed her business until the time she sold it, her business became completely debt free. Erin also sold her business for forty times her original investment.
That was all cash in her pocket!
Since that time, Erin has been helping other boutique fitness studio owners, gym owners, and people within the wellness industry do the same within their business.
I love hearing success stories like Erin’s! But you know that she had to have a few points in her story that were not all that glorious! And that is what allows everyone else to relate to her story!
Making Changes to Your Business Model
One thing that Erin loves telling people right now is that if you are planning to start a business, now is the time to do it. She started her business during a financial crisis and everyone thought she was insane. But her business thrived and the businesses that are lucky enough to make it through and get to the other side are going to be so profitable and successful.
And if you currently have a business, now is the time to make the necessary changes in your business. You now have the perfect excuse. One of the biggest changes you can make right now is pricing. You really have to analyze your pricing and take a look at it over the last eight months.
Then ask yourself, “Have you really continued to maintain a profit margin? Have you continued to have a steady flow of cash?”. If the answer is no, then Erin and I can both tell you it’s due to your pricing. If you are still charging a per session class pack, then you must change it to a recurring revenue model. Switching your pricing model is the only way you can guarantee sustainability.
You may not believe that your business problems are tied to your pricing, but ask yourself if you did the proper analysis when you created your pricing. Did you analyze your pricing or did you simply charge whatever your competition was charging or less than what your competition was charging? We have seen the latter so many times and those owners are simply not making a profit.
How to Find Your Pricing
There is actually a formula for creating profitable pricing for your business. The first step you have to take is determining what your minimum monthly sales goal must be. You will find this number by adding in all of your operating expenses, your payroll, your liability, your debt, and your owner’s pay.
This will give you your monthly sales goal. Once you have that number, you will need to do an analysis on your capacity. Then your capacity will tell you what your monthly client value needs to be. This is basically how much each client needs to be worth to your business based on your capacity.
Let’s use $150 for an example. The $150 will be the pricing point for your mid-range package. You would then create pricing that has a weighted price for single services, which will be intentionally high. This will discourage people from purchasing a single class.
The larger commitment packages will be your bottom line number.
Conquering the Sale
Erin uses what she calls the client flow when conquering the sale. The client flow basically goes from when the client first contacts you all the way through to the collection of money. It’s going to be unique for every business and it must be individualized for every client. By the time you are collecting the money from your client, they will know exactly what you have to offer for their life, how you fit into their budget, and how you fit into their schedule.
Remember, that your goal is to solve a person’s problem, not simply collect their money! If a client begins to object, answer their question, reconnect with their pain point, and position your service as the solution that will solve their problem. You’re only asking them to commit to solve their problem.
Both Erin and I recommend using a checklist type script, so you make sure you remember to share everything with your clients. You don’t have to go down this checklist in order, but you do need to make sure you cover all of the points. This will ensure a potential client has all of their questions answered when it is time for them to make a final decision.
A client will contact you because they are interested. Therefore, if a client ends up saying no to you, something happened within your client flow. A step was missed and you allowed the client to slip out. This is why you need to be confident that you have everything your clients need.
Your Ideal Client and Pricing
You have the choice to be the best, the cheapest, or the most efficient. You can’t be all three though. When you are setting up your pricing, you’re targeting your ideal client. Your ideal client is going to be able to afford you, especially if you are doing the right type of marketing.
Once you have your pricing in place, it is a good idea to do a profit analysis. Determine what your current profit margin is, so you know which direction you are headed in. This will allow you to make adjustments to your pricing and expenses, so you can be where you should be with your profits.
As soon as you have everything where you want them to be, you can work on the systems you have in place. This will ensure that everything is ready for when clients are walking through your door. Those systems will also allow you to re-engage with existing clients and transition those clients into more profitable packages. Those steps alone can help you increase your profit margin by 95%.
The reasoning behind that is those clients are your cheapest clients. They are already in the door and you don’t need to convince them of anything. They love you and want to continue to work with you.
You may be worried about increasing your prices right now in our current situation, but Erin says now is the best time! People are actually expecting price increases right now. Since you may only be operating at 25% or 50% capacity, your clients understand that you need to charge more.
Besides, you should have been increasing your prices every year since you opened and most likely, you haven’t been. A 3% to 5% price increase is normal. After all, your rent likely increases 3% every year and your taxes and expenses increase, so why shouldn’t your prices? So, now is the time to get your prices into current market value.
Learn from Erin’s experiences and price your services properly. You will have a healthier profit margin, can pay yourself more, and hopefully have systems in place that will allow you to work fewer hours than ever before!
It’s a win-win for you and your clients!