This is a guest blog post from Howard Polansky of Cash Flow Coach.
I consume podcasts more than any other media. I am subscribed to WAYYYY too many and have to listen to them at 1.6x speed to not get too far behind. One podcast I truly respect is Radical Personal Finance by Joshua Sheats.
Joshua is a husband, father of four, in his mid-30s who walked away from the traditional financial world and has taken his family all around the world to be a global citizen. He is highly intelligent, sometimes way too verbose, but has done something so elegantly simple. He has explained financial planning in 10 words.
At some point or another, most of us have had a relationship with debt. That first credit card we got in college or the mortgage to buy our current home. Sometimes the debt is used for good; other times the debt wasn’t in our best interest. (Maybe some of those early credit card purchases weren’t the best idea.)
I don’t want to sound polarizing, but there’s a good time and a bad time to use debt. That’s true in your personal finances and in your business.
So how do you know when using debt is a good thing and when you should plan to use cash?
This is a guest blog post from Howard Polansky of Cash Flow Coach.
While it’s important to raise your prices as you go because your value and expertise will continue to improve over time, This isn’t the area that creates the greatest impact to your business.
As Mike Michalowicz mentioned in his book, Profit First¸ he had a 7-figure business that was losing money. The average person would think to themselves, how could that be? It’s because the top line has nothing to do with what’s left in the pocketbook. If the million dollars of revenue costs you $1,000,001 to generate, you are not running a profitable business.
An audit of your expenses should be a required task every year, at a minimum. I know Profit First professionals (PFP) will help you with an audit of profitable/neutral/destructive expenses when a new client onboards. Why? Because they are guiding you into an operating expense budget your business needs to fit in.
At the start, it almost feels like those pants you haven’t worn since you put on the COVID-15. It’s tight, you don’t know where to cut, but your PFP is your guide to realize what tools are must-haves to your business vs nice-to-have. However, there’s a deeper reason that most PFPs may not even realize on why this should be done annually.
I credit Tim Francis of Profit Factory for making this concept simple to understand. Tim calls this the BLOAT of the business. Most people understand the concept of the profit margin of the business. If my business generates $100,000 of revenue and my expenses are $90,000, my profit is $10,000, or 10%. To generate an extra $2,500 of profit, I need to sell another $25,000 of goods and services. That may feel intimidating just thinking how much more you have to sell to barely create a bump in profit.
But have you stopped to think: If I can save $X from my expenses, how much less do I have to sell? This goes back to the BLOAT. If I can cut a one-time expense of $100 and my business has a profit of 10%, I won’t have to sell $1,000. If that $100 was a recurring monthly expense, I won’t have to sell $12,000!! It doesn’t sound real, but the math is the math. So let’s take this step by step.
First, figure out your profit margin. It’s simply revenue – expenses = profit. Divide the profit into your revenue to get your profit margin.
Next, we figure out the BLOAT. Divide 100 into the profit margin to get there. If your profit margin is 18%, we calculate 100/18 = 5.56.
Now we come to the justification. Let’s say the one-time expense is $200. We multiply the BLOAT number of 5.56 by $200 to equal $1,112. The question we ask ourselves is this:
To justify this $X (recurring/one-time) expense, I have to sell $Y of goods and services. Is it worth it?
With this example, to justify this $200 expense, I have to sell $1,112 of goods and services. Is it worth it?
If it is a monthly recurring of $69, we multiply the expense by BLOAT and by 12. In other words:
$69/month x 12 months x 5.56 BLOAT = $4,603
To justify this $69 monthly expense, I have to sell $4,603 of goods and services. Is it worth it?
I’m not here to judge what you need to run your business. I’m here to help you truly analyze, by the numbers, how you justify each and every expense and understand how much in sales each expense really costs.
The added benefit of scrutinizing and justifying each expense is that when you can cut an expense permanently, the profit margin of the business increases and the BLOAT decreases. Playing defense is how sports team wins championships and how you create a championship business.
This is a guest blog post from Howard Polansky of Cash Flow Coach.
I love to analyze numbers. Making projections about how much money this will grow at X% over Z years is just easy for me. But I have to be honest and know I am driving myself crazy over that stuff. If someone asked me what numbers they should track if they could only follow one statistic in their own personal financial life, I would tell them to track their savings rate.
We’re in business to have a business, which means making sure it’s profitable year over year. And even better is when your business grows over time–either slow and steady or more quickly.
Like anything in life, you get back what you put into business. If you nurture it with the right actions and tools, it will flourish. If you ignore parts of it, you’ll struggle.
Have you set big, lofty financial goals for 2022? And if so, how did you come up with those numbers?
Setting financial goals is incredibly helpful so you have something to strive for, but setting the right goals is vital. If they’re not realistic, you’re bound to feel frustrated mid-year, throw up your hands and give up.
Let’s avoid that by setting your goals with intention and research. Answer each of these questions and write down any numbers and calculations so you have them handy.
Every new year, do you go through the motions of creating a “new year, new you,” trying to overhaul your business and your life to make this year your “best year yet”?
Look no further than your social media feed and you’ll quickly find that you are far from alone. Everyone is encouraging us to be better than before by changing our diets, our exercise regimens, our reading habits, our relationship statuses, our home organization systems, our money management, you name it.
And so many of us buy into it. I’ve been guilty of this too!
Then when we can’t hold onto these new (unattainable) habits, we feel like failures.
What if we try a new way of making progress toward our best year yet? Instead of trying to change it all, try finding little things you can do to make consistent progress in your business. And let’s forget the major overhaul.
This applies to any resolutions and changes you want to make in your personal life, but let’s talk about how to do this in your business.
We’re not trying to breathe life into your business, we’re doing what’s Consistent, Predictable, and Repeatable. CPR.
What are the little things you can do to make consistent growth in your business? It’s not about overhauling your finances so you can set yourself up to be profitable next year; it’s about consistently allocating to your Profit account—starting with just 1% a month, if that’s where you have to start.
Make it a habit: Twice a month, transfer 1% of your revenue to Profit. Once you’ve established this habit, increase that allocation to 2% or 3%—whatever works for where you are right now.
Not sure how much to allocate? Grab our free Profit First Overview and learn what your percentages should be based on your current revenue.
As you become more consistent in your allocations, they start to become predictable. You know that on the 10th and 25th of each month, you’ll have a financial date with yourself to make those allocations. And you’ll hopefully start to incorporate other pieces of the financial pie in those dates, like reviewing your balance sheet and profit and loss statements, checking in on your expenses to see if there’s anything you can let go of, and planning for future purchases.
Consistency and predictability will help you to create more systems so that everything you do is repeatable, without recreating the wheel each time.
Some ideas for systems around your financials include:
One of the biggest challenges to setting new goals and intentions in the new year is that we want to do it all. We want to learn new things, launch new offers, set new revenue goals. But there’s only so much time in the day, especially if you have some personal goals and commitments you want to keep.
Joining mastermind groups and coaching programs and buying courses is fine, but know what you want to prioritize learning. Then do that and only that until you’ve mastered the concepts. Only then should you focus on doing something else that’s new.
If you want to lose weight, you know you need to focus on nutrition, fitness, and mindset. But if you’ve been off the wagon for a while, you really can only focus on one thing at a time. Determine what’s most important to start with and do only that for a month, then add in the next most important part of the process and so on.
Just like if you’re trying to overhaul your health, trying to do everything at once is a recipe for overwhelm. If you’re trying to “fix” all the things in your business at once, you’ll stress yourself out and not make progress on anything.
This really is an exciting time of year and it’s ripe with possibilities. What one thing will you choose to start with to become Consistent with, so it becomes Predictable, and then Repeatable? Where will you start your success in 2022?
Everyone likes being profitable, yet no one likes paying taxes. So, how can we reduce taxes without reducing net profit?
Making contributions to your qualified retirement plan (SEP/SIMPLE IRA; Solo 401-K; etc) through your business can reduce your federal income tax, but does not reduce your taxable net profit. The cool and unique thing about this deduction is that the IRS allows you to make retirement contributions beyond December 31, up to the filing deadline of your main tax return, in order to maximize your deduction for the previous year.
The health insurance premiums paid on behalf of the owner(s) work very similar to retirement plan contributions: They reduce your federal income tax, but not your business’s net profit. Health savings accounts can be used to achieve the same objective. First, make sure you’re eligible for the deduction. For example, if your spouse has health insurance through their employer and they have the option to cover the entire family, you may not be able to claim the deduction through your business.
If your small business is profitable (especially beyond $50K/yr) and you file taxes on Schedule C, you may benefit from electing to be taxed as an S-Corporation. This strategy will help you to legally reduce self-employment tax. But be careful when adopting this strategy. Electing to be taxed as an S-Corp comes with increased compliance issues, which means more fees. You’ll have a separate tax return to prepare, and you’ll have to run a payroll for yourself (which will require payroll tax returns). You’ll want to do this with the help of a tax pro. Make sure all of the extra fees associated with becoming and maintaining an S Corp do not eat up what would have been your tax savings.
All business owners will eventually end up filing a Form 1040 (the main tax form), and it includes all of the credits and deductions that aren’t business-related. Make sure you are maximizing all credits and deductions outside of the business. They will not reduce your net profit at all but the tax savings can be great.
The main thing to remember about the 1040 tax return is that it includes ALL sources of income, and well as all of the available credits and deductions; not just the business stuff. The popular ones are the student interest deduction, charitable contributions, the Child Tax Credit, Earned Income Credit, etc. Reach out to your tax pro to see which credits and deductions you may qualify for.
You’ve determined that it’s time to raise your prices. How do you communicate this to your clients and customers?
First of all, don’t make it sound like you’re breaking bad news. Raising prices is a natural and recurring step in the life of a service-based business. Know your worth. Get confident and comfortable in your own head of the value that your business provides. If you can’t convince yourself that a price increase is warranted, then you won’t be able to sell it to anyone else.
Obviously, you don’t want to alienate your clients. You want to keep them happy. And believe it not, your clients don’t just want you to survive—they actually want you to be profitable. So this can absolutely be a win-win situation if you play it right.
You especially want to get your long-term clients on board with a price increase. If they’re unhappy, they have the potential to spread their discontent throughout your culture and community of members. This is the kind of water fountain talk you want to avoid happening at your place of business or on social media.
In this post, we offer some suggestions and thoughts on informing your clients about pricing changes. At the end of this post, you can find a link to our pricing increase template letter to help make this task easier for you.
Keep in mind, your clients will view a rate increase relative to the price they’re currently paying. A $6 per month bump might seem like no big deal, but if their membership fee is already $80 per month, that’s a 7.5% increase in price, which may not go unnoticed—especially if they’re currently paying a higher-than-market price for your service.
People get attached to their service providers especially in fitness and wellness. They care that they are compensated fairly and have good working conditions and opportunities. So your clients will usually get behind an argument for increasing rates that involves paying their service providers more, or investing in your team in some way. It’s more than fine to get a little personal about this in your email.
As I’ve said recently, I’m in favor of increasing prices regularly by small amounts rather than by large amounts less frequently. Clients are more accepting because they’re likely to see that you’re just keeping up with the rising cost of doing business. But there are times when a large price increase is justified—to you, at least.
The important thing here is to demonstrate how they’ll benefit from the improved services you’ll be providing with more funds in hand. Even better if you can tie it in directly to how this will help them reach their goals or soothe their pain point.
Maybe you’re going to improve the temperature control in your building so they won’t be chilly anymore while getting a massage. Or maybe you’re adding new equipment so they won’t have to wait in line to use the weight machines, and they can get home faster to their kids on gym night.
In general, if you’re not comfortable asking your clients to ride the increase with you, ask yourself if there’s something you need to add in to your services so that you ARE comfortable charging an increase.
And because we know it’s hard to ask for money, sign up below to get a free pricing increase template letter you can use.
If you’re trying to increase your business profits (and who isn’t?), you might think the sure-fire way to do that is simply to raise your prices. If your customers pay more, you’ll make more. Right? Not necessarily.
Well, if you’re using the Profit First method, raising prices will indeed equate to increased Profit. Because you take in revenue, you immediately pay yourself a profit. So if you take in more revenue (by raising your prices), you’ll pay yourself more profit. But increased revenue does not necessarily mean increased profitability.
And what is profitability exactly? It’s a measure of your profit relative to your expenses. It’s an assessment that helps you determine if your business can sustain itself and grow. Ultimately you want to be able to project the profitability of your business well into the future.
Here’s why raising your prices does not automatically equate to increased profitability.
You do have to raise your prices from time to time no matter what because of inflation. The cost of doing business is always gradually increasing because the costs of goods and services in our economy are generally rising over time.
So if you raise prices just enough to keep up with the cost of doing business, you might not increase your profitability at all. So how do you increase profitability?
There are endless tactics and factors of influence. (Here are just a few ideas specifically for gym owners.)
But at the most basic level when we’re talking about profitability, raising prices alone won’t cut it. You have to raise your prices and you also have to monitor your expenses.
Price increase strategy incorporates many factors. Ideally, you have a system in place for reviewing your client pricing structure on a regular basis. This involves running reports and examining numbers that are very specific to your business and its service offerings. Read about one fitness studio owner’s successful formula for profitable pricing here.
But let’s say you’re leaving your pricing structure in place for now because it’s working well. How much should you raise your prices, even if just to stay even with current expenses?
I’m always a proponent for increasing your prices regularly by small amounts rather than implementing larger increases less often. It’s easier for clients to stomach.
At minimum, we suggest increasing your prices by 1 to 2% annually to account for an inevitable increase in the cost of something or other. But a 3 to 5% increase is very standard.
Your landlord might raise the rent, or the cost of your CRM software monthly subscription might go up—or both. You might be able to predict how much your vendors will raise their prices this year by reviewing the history of previous years.
And then consider whether you need to upgrade to a higher tier of an existing expense, or purchase something new altogether this year. You’ll need to factor that into your spending plan, and possibly your pricing increase, if you haven’t saved ahead to pay for it.
You should examine your full roster of expenses at least quarterly, and definitely whenever you’re thinking about implementing a pricing increase. We talked about analyzing your recurring business expenses and how to reduce them in this earlier post. Trim whatever you can. This is a step toward increased profitability.
Along with that, you should look at any other areas where you may have inefficiencies in your business. Are you running a tight ship with your team members for maximum productivity? Trim here too, if necessary. Labor inefficiency is an enemy of profitability.
Now you’re aware that you need to increase prices incrementally on a regular basis just to keep up with rising costs. Of course, it’d be great if you also could strategically raise prices to help you achieve your broader business goals.
For example, do you have a goal to pay yourself more every month? You can use a pricing increase to take an incremental step toward that. Work backwards with the numbers. Do you know what your revenue needs to be in order to increase your Owner’s Pay by as much as you want to? Figure out how much you need to increase incoming revenue per client in order to make that incremental step.
Overall, determine an increase that you are comfortable selling to your clients. Are you confident that a $10 increase in their monthly membership fee is worth it for them?
Part of raising rates and your journey toward increased profitability might also involve changing your business model to add more value to their membership. If your goal is to have a higher market share (more clients), then you’ll naturally need to scale your business over time to accommodate them.
Having a higher market share also makes you a more competitive business, and this alone can improve profitability.
And stay tuned for next week’s post, where we’ll offer some best practices for how to tell your clients that prices are going up!