Category Archives for "Profit"

Managing Quarterly Profits and Taxes

If you’re a Profit First business, you get to take profit distributions four times a year. It’s exciting to see the fruits of your efforts and be able to boost your income as the business owner.

It’s honestly the best thing about Profit First, that you’re not limited by your owner’s pay (though it is important to pay yourself a living wage!). You get quarterly “bonuses” that you can spend as you wish.

You might ask, why not pay yourself more each week or month and enjoy the extra income in the moment…so you don’t have to wait until the end of the quarter? Because your profit distribution is not part of your salary. Even though it might look that way on your taxes.

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Good Uses vs. Bad Uses of Debt: Knowing the Difference

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?

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Why You Must Raise Your Prices

This is a guest blog post from Howard Polansky of Cash Flow Coach.

Raising your prices is not about greed. It’s also not about inflation, though it does help offset the rising cost of pretty much everything these days.

The true reason to raise prices is two-fold. First, it allows you to work with the people that you prefer to work with because they seem to be the easiest to work with and understand the value you bring to their lives. Second, and more importantly, by weeding out the fringe, you will have more time to think of how to be even more productive without killing the business. Does this sound crazy? I hope so, but I can back this up.

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How to Reduce Taxes Without Reducing Net Profits

Everyone likes being profitable, yet no one likes paying taxes. So, how can we reduce taxes without reducing net profit?

Retirement Contributions

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.

Health Insurance Premiums

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. 

S Corporation Conversion

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.  

Non-Business-Related Deductions and Credits

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.

Raising Prices Doesn’t Guarantee Increased Profitability

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.

Profitability vs. More Profits

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.

How to Plan a Pricing Increase

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.

Raise Prices to Achieve Broader Goals

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.

Final Thoughts

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!

Your Black Friday Deal Probably Needs a Drip Account

Did your business promote a Black Friday deal this year? If so, now’s the time to set up a Drip account within your Profit First system—before you spend the revenue that you made.

What’s a Drip account?

It’s an account you create to help you manage the cash flow when you receive a lump sum payment instead of installments for a service or offering that you’ll be providing to your clients over a long period of time.

Maybe you’re selling a discounted annual gym membership to customers who pay upfront for the year in full. They’ll be using your facilities and your resources over the course of 12 months and your expenses to service them will be accruing over that same period of time. So it doesn’t make sense to treat their full payment as money in your pocket now.

Instead, stretch their payment out over 12 months even though you’ve received it all at once. The sensible thing to do is to place the revenue in a Drip account, then take a proportional amount of the money and “drip it out” each month. So you’re matching revenue with expenses on the same timeline.

If you don’t allocate this money correctly, then it’s just money without a plan, and you’re in danger of spending it. We see this a lot: businesses in year-round “Black Friday mode,” trying to sell annual memberships, or offering other long-term, one-time payment deals, because they’re always needing a large influx of funds—to pay for services they sold months ago but don’t have the resources to cover now.

As one of the biggest spending days of the year, Black Friday is a classic time to offer special membership or subscription deals. But your business should use a Drip account for any similar payment structure regardless of the time of year. Retainer fees, sales of packages and bundles, pre-payments—these all might warrant the use of a Drip account. 

Here’s an example of how to use your Drip account for annual membership fees paid in full up front.

  • Put each lump sum payment into the Drip account.
  • Automatically transfer 1/12 of the amount to your Income account every month as if you just received the revenue (in two payments on the 10th and 25th as per the suggested Profit First schedule would be great).
  • Proceed as you normally would to allocate the funds by percentages—into OPEX, Owner’s Pay, Profit, Tax, Payroll, and any other advanced accounts you’ve created within your Profit First system (the Drip account is considered an advanced account as well!).

Of course, if the membership deal is six months instead of 12, or if it’s an unlimited package deal for three months, then you’d prorate the funds accordingly. You might need to create multiple Drip accounts if you have multiple levels of deals on offer. You can also book a call with a professional to help you determine how much to drip each month.

Trust the Drip account system. 

Don’t be tempted to move more than 1/12 of the Drip account funds into Income every month. Can you see how you will end up overinflating your Profit First accounts? OPEX will definitely be too high, and you will mistakenly think that you can spend more on expenses—which could topple your whole Profit First system.

With Owner’s Pay, this inflation can be especially dangerous. If you’re an owner who withdraws the full amount from your Owner’s Pay each pay period, you’ll be paying yourself prematurely for services not yet rendered. (And you know we advocate for building a buffer in Owner’s Pay. Determine a living wage for yourself and withdraw that every month, leaving the extra for when tough times hit. True, Owner’s Pay will grow as your revenue increases, but you should be making calculated decisions to increase your Owner’s Pay allocation percentage using accurate earned income figures from previous periods.)

Similarly, you might think the Drip account should only be for setting aside some OPEX monies, and you can do what you want with the rest. Which would be…? Putting it in Owner’s Pay? Or Profit? You can see how you run into the same problem.

Black Friday shouldn’t put you in the red.

When you do offer long-term, prepaid deals, you need to price them appropriately to cover your expenses that will accrue over time. You’ll probably need to pay yourself or a team member to work with the client, so factor in payroll expenses. Don’t forget rent, utilities, insurance, and anything else that falls under OPEX.

You may think of offering deep discounts for existing services to get people to sign up. But consider how you can add value to your product offering instead of discounting the price. Throw in a free month of a nutrition app with the purchase of a gym membership, or add a free massage for buying a bundle of ten at full price. We’ve encouraged you to get creative to incentivize your clients in an earlier post.

We caution you against relying too heavily on “paid in fulls” to sustain income. Monthly recurring revenue models are much easier to manage in terms of cash flow. As you head into the new year, what are some ways your business can create excitement around a monthly subscription rather than waiting for the next Black Friday to roll around?

Analyze Your Expenses and Increase Your Profits

Who doesn’t want a more profitable business? We’re in business to help people, sure, but we’re also here to make a living. And if we want to make a good living with a business, we need to be profitable.

Generally, there are two ways to increase your profit:

  1. Increase revenue (while keeping expenses in check), or
  2. Reducing expenses (while keeping revenue the same)

This article will focus on the latter—reducing expenses to increase your profitability. Because while increasing revenue is important, most businesses forget that increased revenue is not an excuse to lose sight of expenses. The beautiful thing about this strategy is that it simply involves cutting some expenses to increase what you keep. Expenses that you probably don’t need anyway.

To reduce your expenses, simply conduct an Expense Analysis. There are many ways to conduct one, but here’s a simple method that anyone can use:

Make a list of your common and recurring business expenses.

  • Go through your bank and accounting records, and be on a special lookout for those small monthly subscription services that you no longer really use or don’t use fully.

Trash or Trim your list.

  • Write TRASH (or strike through) any expense that you can eliminate without negatively affecting your business (think about services that you no longer really use, but are still paying for)
  • Write TRIM next to expenses that can be negotiated down to a lower rate, replaced with a competitor at similar quality but lower price, or downgraded without issue to the business. 

Contact the vendors to cut/trim expenses.

  • Do your research ahead of time if you plan to ask for a reduced rate.
  • If you’re switching software, set up a free trial of the new service first before cutting out the old one. If needed, hire a professional to help with the transition.

Any business can do this in a couple of hours. The more your cut, the more profitable your business becomes–as long as you’re not cutting out vital services in an effort to save a few dollars. It’s worth weighing whether cutting out a service will mean less fluidity of workflows or more time investment for you. 

We recommend going through this process on a quarterly basis at a minimum. This practice will keep you financial efficient and profitable.

Not sure if you can eliminate a particular expense? Try this test…

Eliminate the expense for a month, but be prepared to regain if needed. How do your customers react? Does your team notice its absence? Are you having to spend any additional time connecting dots that are no longer connected? If no one is negatively affected, then you could probably eliminate the expense.

Remember the old saying, “It’s not what you make, it’s what you keep.” Doing a quarterly expense analysis will help you keep more of your money, and help you earn higher profits. If you need help implementing Profit First in your business, let’s connect. Schedule a call with us today.

Revenue Streams or Trickles?

There is a lot of thought/opinion/advice when it comes to diversification and creating different revenue streams within a particular business model. The “don’t put your eggs all in one basket” theory. And it sounds good. If one “stream” starts to dry up, another one will help mitigate total disaster.

Here’s the rub. Too often in a business, I see “multiple streams of income” become “throw a bunch of stuff on the wall and hope some of it sticks”.

When it comes right down to it, how many Revenue Streams does it take to have a great business?

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Why Would You Track Financials in Excel – A Rhetorical Question

A lot of business owners start out doing their books in Excel. It’s something they know, and they’re not ready to pay for a service like QuickBooks Online or to pay a bookkeeper.

In Excel, you can sort columns and rows, set up formulas to add up transactions, color code rows and fields based on type of transaction, even make notes right in the fields.

And sure, there’s probably a lot more you can do in Excel, but it has its limitations. Steep limitations.

That’s why we encourage business owners to get out of Excel and into QuickBooks Online as soon as possible. And then, once it’s out of the virtual box, it’s important to customize its setup to meet your business’s unique needs–something Excel couldn’t do if it wanted.

When done right, QBO gives you everything you need every month, with just a few clicks of the keyboard.

What else can QBO do that will make you want to kick Excel to the curb?

Create Recurring Payments

One of the best ways to improve your revenue is to create a system where clients pay for a service month after month. This makes sense in a traditional gym, with monthly membership fees. But so many other businesses in the health and wellness field can go this route too–and make the payments automatic for the consumer. (We have plenty of thoughts on how to do this. Let’s chat!)

Monitor Your Expenses

You may not need more revenue in your business; you may need to get a better handle on your expenses instead. It’s really easy to do this in QBO, and to do it on a monthly basis, because you’re categorizing transactions and reviewing your balance sheet and profit and loss statement regularly. If you wait until the end of the year to clean up your books and review where all the money went, chances are you won’t catch that subscription you should have canceled or those ads that aren’t really paying off. In the end, you’ll spend a lot more than you needed to!

Identify Tax Write-Offs

You know a lot of the standard write-offs but with QBO’s ability to categorize, it’s so much easier to write off certain expenses–and minimize your tax burden. It’s really easy to identify often-forgotten tax write-offs like bank charges, health insurance premiums, equipment costs, internet and phone expenses, and more because they’re right there in your books.

Everything in One Place–Electronically

Have you ever tried to build a P&L in Excel? Manually? (Whatever did we do before computers!?) Without something like QBO, you’re hunting for receipts and financials, you’re looking in one place for recurring transactions and another place for one-off sales. It’s a lot, and trust us when we say we’ve seen it all. With QBO, you have a one-stop shop for all things business financials. And it will change your life.

So when we ask, “Why would you track your financials in Excel?” we’re asking in jest. We don’t think you should if you want to have a thriving and profitable business.

Are you ready to get off Excel and onto QBO? Let’s chat!

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