This month’s “Ask Connie series” question about Profit First even stopped ME in my tracks. Hint: this is often where a third party, one that isn’t emotionally attached to your business, makes for a helpful profit ally..
But I can’t even see how to cut my expenses – what’s your advice?
Review your expenses
In my last blog post we focused on how to increase our owner’s pay. As I mentioned, one of the fastest way to increase funds to pay yourself is going to come directly from the expenses your business is paying. Here are some items to take a hard look at. These cuts will be for a short time. Depending on your situation, and all the areas you are willing to address, plan on cutting back anywhere from 6 to 18 months; that’s how long it takes to make the Profit First system a habit. During these months, your intentional spending will start to come naturally.
- It takes roughly $150,000 in revenue to support ONE full-time person (which is usually you, the owner – this fact is from the book by Mike Michalowicz, Profit First). I know that no one ever shared that statistic with me when I was growing my business. In fact, I was getting the message to outsource as much as I possibly could when I was making $80k. Which is why we often find ourselves in this problem. While it may seem daunting to take back work that you have successfully delegated, if you aren’t able to find cuts in other areas, then stop feeding everyone else and make sure your household is properly fed, first. Reminder – your business was created to support you! As your funds get happy then, with intention, bring back team members.
Consider this: If how you brought in team members resulted in the profitless business you currently have, perhaps you need to open your mind to a different way of leveraging your time. One of the lessons I had to learn several times over (and each time was costly in funds and in my sanity) is that there are MANY ways to leverage your time and bring on team members. Perhaps it is in the form of an intern. Perhaps it is that instead of paying for team on the “cheap” side you actually hire an expert to step in – yes that initial bang may be more in cash, but also consider the time saved. Perhaps it is in the form of hiring virtual at home folks that need to be able to work on their time availability – could you adjust the work for that, more importantly would you adjust your mindset?
- Office space – this is if you are renting space outside your home, which is sometimes absolutely necessary. There are times, however, that you need to consider why are you paying overhead costs for such a large space, or any space for that matter. Take a look at how to cut back in your occupancy costs, maybe even move to a home office if your lease is up for renewal. I recently did this myself. When I first got started back in 2001 I was in a home office and had an awesome employee mindset to go with it. I had no idea what good boundaries and time/life balance was. To move the business to a new level and regain some sense of a life, I opened up commercial space. The problem was, I didn’t do it intentionally, and that is where all my learning opportunities began. What I paid in commercial space over the next six years was exactly the amount of the debt the business was carrying. So take a moment and really consider if that space is essential for your long term profitable business plan. Plus, there now are some incredible co-working spaces available at much less expense, which weren’t so readily available when I was growing my business!
- Overall expenses – if you are still not able to cut anything, then sit down with a person that is not emotionally attached to your business and go through your annual expenses. Review each line item and really take the time to question the usefulness and value. Get quotes on insurance, cell phone, internet, and merchant processing. Review your software tools and anything that just automatically charges to your account. Hint – if you haven’t accessed that tool/program/subscription in the last 30 days, here is some tough love: why are you still paying for it? Sure it isn’t that much money, $10 here, another $20 there. However, you are setting the intention that you want to leak finances through your business on un-useful activities. Which, in turn, the energetics of money will find you many other ways to leak and spend that money without benefiting you.
Look, I’m not saying these cuts have to be forever, but they do have to be for right now. Adjusting your habits to live within your available cash flow is your starting point. Once you understand where your ground zero is, that bare minimum you need to survive at, then we can use it to leverage you into a different financial story.
Leverage your revenue
If you feel that all of your expenses are legit and they all need to stay, then the only other area to look at is sales. Leveraging is all about taking your constant – your time or your expenses – and generating and creating more revenue with the same time and expenses. This is where you earn yourself a cash flow cushion that will allow you to set aside funds to pay yourself, create funds for profit and tax, and allow you to continue to pay for all those expenses you feel are necessary and required.
- When was the last time you raised your rates? All costs have increased in the 2-3 years, so if you haven’t reviewed your actual hard costs, you are way past due on this.
- Do you have profit built into your pricing? Most businesses base their revenue simply on covering their hard costs. Often they don’t add their own salary to that mix or even leave out the overhead of running the business because it isn’t directly related to the sale. Or you have profit but you didn’t add any buffer time into your mix to cover time overage on the project. If you haven’t actively added ANY profit calculation into your pricing start with 30-40%.
Consider this: What I see most with coaches, consultants, and other service providers: to get to their cost, they take what they think their billable hourly rate is and times it by the hours they think the project will take. However, if you didn’t really dive into how that hourly rate came to be, then is there profit built in? Is there a cushion? Most of the time this is not the case. Most of the time, that rate was picked because that’s “what everyone else does”. You aren’t everyone else, so stop following the crowd. Take the time to verify and intentionally set your pricing with profit. Another painful lesson I learned the hard way!
- When was the last time you looked at your project profitability? If you have been adding profit for a while, dive in and look at the profitability on projects, and fine tune your pricing. Remember to make sure there is an overhead allowance for each project which normally includes YOUR salary. Hint: Not only does that overhead include your salary to do the work, but what about your salary as CEO and administrator of your business? Someday you may want to replace the “doing” with a new team member, and if two distinct roles are not built into the overhead, you’ll never have quite enough to grow.
- Make sales a priority EACH day! As the owner, your number one responsibility is sales. If you have your head down focused on delivering services, you will eventually turn around and realise there are no sales coming in auto-magically. Each day: make calls, reach out to people you’ve already spoken with, connect with strategic partners, work on marketing activities, network. Get noticed. Get heard. Most importantly, ask for that sale.
Wow, this post was full of the painful lessons I learned as I implemented the Profit First system. These are also the lessons I see my clients learning as well. When the business is cash happy, we don’t consider these things – these slow drips of money exiting our business right under our noses. This is really the meat of Profit First: intentionally choosing how we want money to energetically show up for our business and for ourselves.
Cutting costs and taking that hard look at your pricing can be easier to accomplish with someone who is not emotionally tied to your situation. I offer a complimentary ½ hour call that you can request here. If we have already spoken, then send me an email to schedule a paid Profit Consult and let’s dive into what’s sticking your progress.
Have a question about accounting, bookkeeping, or cash flow?