Income (or Revenue) is how much money you receive.
Profit is how much money you have left after expenses.
Profit = Revenue – Expenses
What if my profits are dismal?
One of my favorite business books is Profit First by Mike Michalowicz. He is a serial entrepreneur who has learned how businesses succeed and fail based on our money habits. Mike re-writes the equation to be Revenue – Profit = Expenses
The normal way of looking at it is taking your income, taking out all your business expenses, and your profit is what’s leftover. With the Profit First method, the focus is on paying yourself first, and then figuring out how to run your business on what’s left.
What a great concept, paying yourself first!
In order to pay yourself first, you need to focus on planning where and when you spend your business money. This is similar to my last post about Creating a Personal Budget. If you are constantly buying “all the things” (I’ve been there) and not actually paying yourself, then you are not really in control of your money. Why should you be paying everyone else but yourself? It's time to take control of your profit.
I’m a lover of tools and resources, but I’ve learned to temper myself and set a plan so that I don’t blow all my could be profits on every awesome tool or course that comes my way. I’ve also had to take a hard look at what I was spending money on monthly and make a few cuts where there were tools that weren’t as necessary as I once believed. I had to take control of my profit, and now it’s time for you to take control of your profit.
In Mike’s book Profit First, he uses a tool called the Profit First Assessment. Here’s what it looks like:
This chart gives you the guidelines for breaking down your business's’ profit. If you really want a breakdown of how to find the numbers for filling this in you will want to grab a copy of the book and ready through to chapter 4. You can also get the Instant Assessment on Mike's website.
Once you have figured out the percentages that you should be allocating to various big categories (Profit, Owners Pay, Taxes, and Operating Expenses) You can break each of those categories down into more detail, particularly the Operating expenses. In a similar way to how I explained Creating a Personal Budget, you break things down by need and priority.
How to Take Control of your Profit
What tools are critical to running your business?
This is going to vary extremely based on industry and size of your business. However, I would dare to say that no matter what your industry, your website hosting and domain name will fall here. Here is an example of a Graphic Designer: Adobe Cloud, Stock subscription, cloud file backup.
What tools help your profits with automation?
These are the tools that you may not have invested in right away, during your bootstrap phase, but are now using to save you time and energy. Examples: Customer Relationship Management software (CRM), Project Management Software, Social Media Scheduling, or Contract signing apps. Some extremists might say to downgrade to free options, and you could if you wanted to, but if they are genuinely saving you time to work on profit producing tasks, then I say keep them.
What are you paying for and not using?
This is where we can “cut the fat” so to say. I had to do this for my own business a while ago because I was getting caught up in paid subscriptions and not using them to their full potential. For me it was paid versions of Buffer and Evernote. Both had free versions, but I was on a paid plan. However, I wasn’t using the features of the paid plans and that was around $20/month I could save.
Where is your shiny object weakness?
You know what I mean! When that perfectly crafted sales email comes to your inbox, or you see the latest course, product, or ebook from so and so and you just “HAVE TO HAVE IT!” I am 100% guilty of “buy all the things” syndrome. Especially the more money by business brings in, the more I want to spend on cool courses or nifty apps. This is where you profits are easily destroyed.
If you have a hard time resisting AppSumo deals, then it’s time to unsubscribe for a while. If you spend all the money you just made from a new client on fonts and graphics on Creative Market, then you’re not seeing the bigger picture. Set yourself a spending limit on these type of things and see what happens. Or if you’re really feeling bold, put yourself on a spending ban and see how it affects you and your business. By spending ban, I mean a ban on non essentials.
Ready to start planning? Download my free business budget worksheet:
Take Control of Your Profit with This Free Worksheet
Make Profit a Priority! You will be more profitable if you are intentional with your spending.