When Your Profit Distribution “Isn’t Enough”
One of the best things about using the Profit First system is profit distribution time. Being the owner of the company, you get to take a profit once a quarter and use it as you wish.
But sometimes, we hear from clients that they’re not making enough profit, or that they want (or need) to be able to take more in profits every quarter.
Essentially, the owner’s profit distribution “isn’t enough.”
First, your profit is just that. A profit. It’s not your paycheck and you certainly shouldn’t count on it for normal living expenses. It’s important that you pay yourself a living wage so you don’t have to count on your profit to live.
Instead, your quarterly profit is a nice bonus that you can use to do something fun with, like save for a vacation, do some home renovations, buy that pricey bag you’ve been wanting, or pay off personal debt (the last of which isn’t fun, but it does feel really good).
That said, it’s okay to wish you had more profit each quarter. There are a lot of reasons why you might see less profit than you wish you had or than you’ve had in the past. Let’s take a look at some of the most logical culprits:
You’ve Added Team Members
I love the idea of profit sharing, giving each team member a percentage of the profits based on their time of service, pay grade, contribution, or a combination of these and other factors. I’ve found that when team members, whether they’re contractors or employees, have an opportunity to benefit from the success of the organization, their buy-in is greater.
If you’re adding team members to your profit distributions, you will end up with a smaller percentage for yourself. This will take some getting used to, but trust me when I say it’s worth it. More team members means more opportunities to scale which means more opportunities for revenue. And as long as the numbers add up and you don’t increase your expenses at the same rate, you likely will increase your profits too.
Your Expenses Increased
There’s a lot of talk about recession and inflation right now, and that means everything is more expensive. If your rent or office expenses are increasing, you’ll probably need to adjust your Profit First allocations…at least temporarily.
If you’ve added to your team recently, this also could cause your expenses to increase and your profits to temporarily decrease. Hiring takes time and money, but if you’ve planned well then you’re increasing your capacity to serve your clients and you’ll see the benefits of this in a few months.
Your Revenue Decreased
Many business owners go first to revenue when trying to figure out why their profit has decreased. While revenue could be the culprit, it isn’t always the case (as evidenced by the first two reasons above).
But the truth is that lower than expected revenue could be the issue. And while it might hurt, it doesn’t have to be permanent and it likely won’t have a huge impact on your business or livelihood if you’ve been using the Profit First system.
At the end of the day, profit is just one metric used to tell you how your business is doing. As with any metric, profit should never stand alone. Use it as just one measure of your business health and success.
If you need support in determining your regular allocations or want to talk about your distributions, be sure to reach out. Let’s talk!