As we close out July, we are closing out our focus on “financials.” It wouldn’t be a financial discussion if we didn’t discuss expenses. As business leaders, we all know that cash is king, which means we must manage our expenses.
Most business owners fumble when they start to layer on expense after expense after expense, telling themselves “I must purchase X in order to make money.” Months or years later they finally pick their heads up from the grind, look around, and say, “Crap, I’m barely making enough money to cover my expenses.” Exactly!
Unfortunately, most business owners run their businesses like the above example. They create a long list of expenses they “need” in order to generate sales. Then they set a price point for the product/service that will cover the expenses AND will be in line with the market. As a result of this approach, there’s very little profit and almost no cash. If you can create a sales target and an expense target, why not create a profit target? And not only should you create a profit target, but why not create it FIRST?
Mike Michalowicz wrote the book, Profit First, and essentially guides you to do exactly that. Instead of deciding what your profit margin should be at the end of the process (sales – expenses = whatever is leftover is profit), decide what your profit must be on the front end (sales-profit = expenses you can afford). This ensures your expenses stay in line and you won’t allow yourself to spend more or blindly spend and justify it as “necessary.”
Let’s go a step further, not only do you want to be profitable but you want cash leftover in your business. You want money that you can pull out of your account and use whenever you need it for whatever you need it for. That’s one step further than profit. Profit is a number on a page, it doesn’t necessarily equal actual, extra money left in the bank.
If you have already gone down the “I will make a profit later, I just want a personal paycheck” pathway and therefore you set your expense allowance first, I’m challenging you to create your profit target and determine when and how you will achieve that profit target each month. If that means reducing expenses or not buying that extra something you were about to purchase, realize the impact you just had on your business. That’s huge!
Expenses are killer on a business if not managed well. Do not let expenses be your demise.