Thanks for being a part of our 3rd weekly entrepreneur newsletter! We are really enjoying writing these and hope that you are getting value from it as well! For today’s newsletter, we want to discuss one of the most common myths that we see throughout small businesses: “A business needs to spend money to make money”. Every entrepreneur wants their businesses to grow. This is a healthy and necessary goal for any business to be successful. However, many business owners focus solely on the top line of the business, sales. And they work tirelessly to grow this number as much as possible, often taking on an unmanageable amount of costs and often debt. We agree that growing our revenue is important, but one of the first things we help our clients understand when working with them is that revenue is not the only or even the best measure of a successful or healthy business. What we focus on and help our clients focus on is actually on the bottom line – profit.
Let me illustrate this concept with a simple example. Joe is the owner of a landscaping business. Last month he just crossed over that golden threshold of reaching $1 million dollars in sales for the year! Great news right! Unfortunately, Joe didn’t seem to feel the relief and excitement that we’d expect from this achievement. While the business made a million dollars in sales, Joe’s business also spent almost every penny of that on expenses like paying for employees, supplies, equipment, or investing in that next great thing that would help grow his business, etc. His business expenses were so high that he couldn’t even pay himself for the past couple of months. As a result, he spent much of his time worrying about how he would pay his mortgage that month, or how he’d keep food on the table for his family.
Too many entrepreneurs focus so much on growing their sales that they fall into this trap: that they need to spend money to make money. So, as soon as money comes in from a customer, that money goes right back out the door to pay for expenses that we hope will lead to more and more sales. While some expenses are definitely necessary (We agree that you should pay your employees on time etc.), this philosophy of spending money to make money often leaves nothing left for the most important employee of the business – you. You own this business. That means you take on all the risk, all the responsibility, you provide better service and better quality than any employee. So why do so many business owners not take a salary or a profit from the business? We have to break this mindset that so many entrepreneurs have and that is the reason the majority of small businesses fail. We need to focus on Profit First! We’ve found through working with dozens of clients that businesses that focus on profit first, making profit the top priority in the business (even above revenue); those are the businesses that are the strongest and the healthiest. Owners who are regularly taking a salary and profit from the business are the ones who feel most in control of their business and confident in the direction their business is taking. And strangely enough, these businesses actually grow faster and live longer than those who don’t! They actually outpace their competitors and have the best ratings from customers and employees! Why? Because they focus on what matters most!
In our experience, businesses that account for profit and pay the owners first go through a process that changes everything for the trajectory of their business. Even though the cash left over is less now (money left after taking out profit and owner’s pay), they are forced to find a way to operate their business just as well as they did before. The only way to accomplish this is to innovate. In other words, these business owners find a way to get the same or more value at less cost. This is the key to profitable and healthy growth. With that innovation comes greater differentiation in your market. You become better than your competitors and your growth becomes natural and accelerates! It’s an amazing process to watch and we are very lucky to see our clients go through this as they both take the profit and pay that they deserve and, at the same time, see their business grow more than they had ever dreamed.
We believe that reading “Profit First” and applying it is essential for every entrepreneur. If you haven’t yet, we won’t be upset if you stop reading and go start reading that book. You’ll see what we mean soon enough!
As always, if you have any questions as you start working through the Profit First principles, feel free to reach out or set up a call with us by clicking here!
Thanks for reading and have a great weekend!
