Is it really time to be talking about profit now during a global pandemic?
Why is this important right now? Because during this pandemic, I have seen two different scenarios playing out.
A lot of small business owners have been burning through cash reserves and taking on new debt. Trying to continue “business as usual”. This has not worked out well for many of them. Several businesses closed their doors for good. And they are still carrying the load of debt they took on trying to make it through. The ones who have survived face an uphill battle to get back to even.
There are a select handful of business owners with a different story. Including several of my independent optometrist clients. They utilized their cash reserves in a smart way. They made tough decisions to cut back or “right-size” their practice for a short while. And they didn’t feel the need (or panic) to increase their debt.
So what makes these select few small business owners different? Simple, they had a strong foundation for profit in place. And even if you didn’t have a strong foundation before, the next best time to do it is right now.
The first step in building a stronger financial foundation is to understand where you are right now. I refer to this as The Business Owner’s Wealth Creation Hierarchy. This hierarchy will help you define where you should focus now as it relates to your financials.
Sales / Revenue Foundation
No doubt sales are important. Your revenue level should be at a “minimum viability”. That means being able to cover your base capacity. Capacity is the staff & overhead you’ve had to invest in to generate a base level of income.
This is the initial ramp-up phase for a new business. But it can also be the area of focus for an established business that has made recent increases to capacity.
The challenge here is that many businesses achieve a certain level of sales and still don’t have money in the bank. So they decide to pursue more revenue. Then they hit that higher revenue goal and still do not get the results they expected.
Increasing revenue without having the proper profit foundation will have an adverse effect. You’ll keep working harder and harder, without the results you want.
Here are a few ways to determine when Sales & Revenue should be the primary focus:
1. Do you have a Purpose-Driven Revenue Goal? One that provides enough money to cover your reasonable operating expenses AND allows you to meet your basic lifestyle needs?
2. Are you generating a consistent stream of qualified leads every day?
3. Are you converting those leads into sales at an appropriate rate?
4. Do your products and services all have strong margins?
Once you have your revenue goal and a working sales process, it is time to focus on your profit foundation.
This is key to transforming your business. Without a real-time system to manage your cash flow and profitability, your success will suffer.
It will take a lot more sales to fulfill your goals. Which means more work for less reward. Here are the key areas to assess at this stage:
1. Does your Income Statement (or Profit & Loss) show a net profit at the end of the year? AND is there extra cash in the bank as a result?
2. Do you consistently have enough cash on hand to pay your bills when they are due?
3. Do you consistently have enough cash on hand to make your required estimated tax payments?
4. Do you have 3-6 months of business operating expenses saved in a separate bank account right now?
5. Are you paying down old debts or accumulating new ones?
The concept here is simple. Only focus on accelerating profits once you have a working model from the first two stages.
This is a tried and true method to scale your business. If you don’t have the first two foundations in place, your business will crumble.
Put another way – don’t work harder to speed up a bad process. Get the foundations set first, then focus on these areas:
1. Do you have a process to increase the number of transactions from your current customers?
2. Is your pricing model appropriate for the amount of value you provide?
3. Are your operating expenses the same or less than other fiscally elite companies?
4. Are your financial reports designed to help you easily spot trends and problem areas where your business needs the most attention?
This is the final stage of the wealth creation hierarchy. Creating and building wealth is a great byproduct of the services you provide. Once you can get money into this stage, your financial results will compound faster.
This is what allows you to lead the lifestyle you deserve. Have the impact you desire in the world. And build and leave your legacy.
Here are the areas of focus for this stage:
1. Do you know if your business structure complements your future exit strategy?
2. Does your investment plan meet your needs for current tax breaks AND long-term investment growth?
3. Do you understand how your investments are taxed?
4. Are you ready to shift your personal experience with money to a mode of abundance? Where you can live your life fully rather than obsess about your money (or the lack thereof)?
Use this hierarchy as a framework to guide you. Focus on the levels in order. If one or more questions in a certain level are a “No”, work on those before moving to a higher level.
Following this basic framework can remove overwhelm about finances. And it will help ensure you enter the next recession prepared.
If you liked this post, check out our Independent Optometrist’s Guide To Financial Freedom.
Eric Levenhagen, CPA CTS is the only financial consultant who helps private practice optometrists improve the financial health of their practice with a simple, proven process called Financial Harmony which will reduce their taxes and increase their after-tax profits by at least $10,000 in the first year, guaranteed.