The Profit Problem: Where Most Small Businesses Go Wrong

Growing a profitable small business is one skill.

But turning those profits into long-term wealth and security is an entirely different one.

My goal for your business is not just to fund your lifestyle today, but to set you up for financial success in the future.                                          

So today, I want to share a simple concept that will fundamentally change the way you think about your business. Not only that, it will set you up for long-term growth, stability, and financial security.

This idea is built on a stupidly obvious truth: you’ll never get ahead in life if you spend all of your business revenue.   

In fact, a business that spends all of the revenue that comes in is by definition an unprofitable business (a non-profit, if you will). If you want to build wealth with your business, you will have to earn a profit and then be disciplined enough to set that profit aside.

 

Your new goal: 10% profit minimum

Here’s how 10% profit would look on the surface:

$1,000 in sales last month – $900 in expenses = $100 in profit.                                             

But this is the backwards way to think about things—in real life, most business owners pay for everything else first, and never have any profit left over at the end of the month.

The key? Take your profit off the top! So let’s reverse that example:

$1,000 in sales last month – $100 profit (stuffed in your savings account) = $900 in available funds for expenses, max.

Note: your salary is part of your expenses, not business profit. (Now, if you aren’t paying yourself a salary yet, then we have an entirely different discussion on our hands—one that, unfortunately, there’s no time to address today.)       

Then each month, take your 10% (or more) profit and use it for the following three things:

  1. Building cash reserves
  2. Paying off debt
  3. Investing for growth

Today I’ll be addressing the most important one of these three: building cash reserves.     

 

 

Get a big ol’ pile of cash

Too many businesses look like most American households: living paycheck to paycheck. That’s a recipe for stress and potential business failure.

You need cash reserves for a few simple reasons:

  • Revenue is inconsistent In the real world, sales and clients don’t come nice and steadily. They ebb and flow.
  • You have fixed expenses:  Whether you make sales or not, your costs are similar each month—and fixed.
  • You need access to cash to endure: The only way to keep your “doors” open for years and years is to have access to cash when you need it.                    

What I suggest you do is create your own line of credit. Instead of borrowing outside money when times are tough, you should be able to pull from your own “line of credit” in the form of a business emergency fund.

Ideally, this should be three to six months of expenses. Add up the monthly costs your business requires and multiply that by three. That’s your minimum goal for cash reserves.

Now, for this system to work, you want to keep this money separate from your main operating account. Simply open up a separate savings account wherever you do your banking and designate it as your business emergency fund. (You’ll want to have this linked to your business checking account, of course.)

Once this is all in place, start taking your monthly profit (10% of revenue, minimum, remember?) and transfer this into your emergency fund every month until you hit that 3-to-6-months-of-expenses mark.

And bam! You now are more financially prepared than 90% of all small businesses in America.

 

The key to winning long-term

This process could take a few months or it could take over a year. Just promise me that you’ll do it.

Start taking your profit off the top every month. Set it aside until you have that big ol’ pile of cash. Then watch how much easier things seem to flow when the dirt flies.

Remember, to do business well, you need to be able to sustain your effort over years and years.

And the surest way to derail that longevity is not having adequate cash on hand to cover the lean months—or years.

So be smart and prepare in advance. If you do that, you’ll last longer than most business owners—and sleep a lot better at night, too.

Graham Cochrane

Graham Cochrane is an entrepreneur and business coach who helps people get paid to do what they love He is also the founder of The Recording Revolution, an online platform which serves 20,000+ paying customers and reaches millions of students each year in over 200 countries! You can contact him at www.grahamcochrane.com.

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