Is Your Business Profitable?

[Pesso]

Hey Square Readers,

Welcome back! We hope you had a great holiday season, and that you’re excited to get back into reading and bettering your business.

Today we’re starting our fifth book, Profit First by Mike Michalowicz!

This book is all about getting your business finances in order, by making sure your business is profitable and that you are getting paid. The book goes into both theory as well as practical strategies of doing this. This includes the author’s core strategy and method of working backwards from taking your salary first and then using the rest to budget what expenses your business can afford.

As we start reading the book, let’s kick off our conversations with a baseline of how your business is doing financially. For privacy and safety reasons, we recommend not sharing your financial numbers. If you do want to give examples, you can share in terms of percentages, rather than dollar amounts.

So let’s talk:

• Is your business profitable? Are you able to easily cover all of your expenses and pay yourself? 
• If not, how do you handle being short on cash flow? 
• If yes, what do you do to get and stay there? 

Start reading the book, and we'll be back next week with more discussions about the author's strategies.

For some extra fun, share a selfie of you with the book here in the comments! 

View and Subscribe to all threads about this book.

Happy reading,

Pesso

[TheRealChipA]

My held copy of this book arrived at my library last week, and I’m already digging in since there is a waiting list for it.  Ha.  The background information about his evolution on this subject has been interesting so far.  Anyway….

Yes, my business is profitable.  That is a rather recent development for Piper’s, and the turning point happened just after the pandemic shutdowns.  Those caused us to take a very hard look and deep dive at our business model which resulted in serious and impactful changes.  Since making significant changes, we’ve been profitable for three years now — anywhere from 7-20%.  So, that is my silver lining from that period of time.  

It’s worth knowing that I look at two profit numbers.  Operating Profit is what is left over after expenses and my newly implemented profit-first draws.  Taxable profit is Operating Profit less savings, depreciation and other tax-only deductions.  Also, I run a cash-flow report from time-to-time to be sure that there are not unexpected bottlenecks waiting to surprise me. To me, monitoring both profit numbers is important, each for its own reasons.

We stay profitable by doing a couple of things.  

1. During our winter off season, I have a spreadsheet that I use to evaluate the previous year’s financials.  This spreadsheet creates a proforma budget for the new season based upon history, assumptions and guidelines/goals for the new season.  I can, and do, tweak it and create my financial guidelines for the coming season from it.
2. I also have a spreadsheet that contains all of my accounts payable.  As soon as a payable comes in, I enter that in the spreadsheet.  It then computes how much I must put away daily to have funds available to pay bills when they are due to be paid.  This has a couple of benefits.  I always have money sequestered that I know is earmarked for bills and therefore not available for anything else.  And I never sweat paying bills.  As long as I do what the spreadsheet says to do each day, each day when it is time to pay a bill I know the money will be there.  This year, because of this book, I have added functionality to also sequester my expected owner draws, which take the form of a percentage of gross sales bounded by optional minimums and maximums.
3. This year I have one goal — to significantly reduce interest I’m accruing on what I call bad debt — credit cards, etc.  My goals are not to add one cent of credit card debt and to pay at least 25% more than the minimum payment due.  My cash flow section of my proforma budget indicates that these are reasonable goals which should increase my profitability in future seasons.
4. In order to ensure that I can pay the bills during the off season (ice cream shop here), I have automatic savings set up with Square.  Believe it or not this does help profitability as it enforces an attitude of thrift.  Those savings are never in my operating bank account, therefore not available to me (except for a possible emergency).  My budget is based upon operating cash after my newly added prioritized owner draws, savings and expenses.  Hopefully there is something left to plow back into the business at that point.  However, if there isn’t I can still sleep easily knowing that I’ve paid myself, ensured season-to-season continuity AND paid all my bills.

I’m not sharing a selfie.  Just picture an old, gray balding Boomer.  Any Boomer will do.  LOL.

[HC_Charlie]

Love your tips @TheRealChipA , especially the Square Savings. I started using it to auto save a percentage of my CC sales to pay my state sales tax each quarter. I add a bit more than my actual state's % to cover any cash sales I may have, and I usually end up with just a bit extra left over after paying the sales tax each time. Just a bit of a bonus!

[Pesso]

How has the savings been going so far, @HC_Charlie ? Do you have other savings folders for the other categories following Profit First?

[HC_Charlie]

@PessoI only use a folder in my Square Savings for Sales Tax, but I could easily add other folders. I think my challenge (especially going into this current year) is that much of my money coming into the business will be processed outside of Square.

I do have a savings account along with my checking account at my local credit union, so I've been using those as OPEX and Savings. And I did open another account at a local bank that I planned to use for Tax savings (although the external transfer to another bank doesn't seem as seamless as I had hoped). If I was processing a majority of my funds through Square, I'd definitely consider setting up more folders as Square does make it super easy and convenient.

[Pesso]

Thanks for sharing, @HC_Charlie

That's a good point about money outside of Square -- a few folks said the same thing. 

That sounds like a good plan! Hopefully you can find some systems that work for you!

[TheRealChipA]

@HC_Charlie.  I wanted to follow up on your post.  After reading it, I had a “brilliant” idea.  Why not set up about a half-dozen savings folders for my priorities, including profit first.  If I do this, then I could (theoretically) sequester funds for all of my profit, sales tax, debt reduction and my off-season expenses from my card tenders (defined as card sales plus sales tax plus tips added to card sales).  Then, the funds that remain (including 100% of cash sales) can be transferred to my checking account for use in paying bills and other regular expenses.  Since I won’t even look at the savings folders the  money I have in my checking account defines my “budget,” right?  

Anyway, your comment about paying sales tax from Square Savings made those creative juices flow.  I totally reworked my pre-season budgeting process and amazingly that budget says that not only will I pay all of the bills AND all of those priority savings items, but that I might even have a little bit more left over.  I slept like a baby after I saw that!  Ha.

So, thanks for that nudge toward an even better financial future for me.🤞

[HC_Charlie]

@TheRealChipAThose Square Savings folders work really well to "hide" or insulate those funds from impulse purchases. I now have no worries about keeping enough in my regular operating account for quarterly sales tax payment. AND since I padded the % to save, I always have a nice bit leftover as a bonus after I make a quarterly transfer.

[Pesso]

Thanks for sharing, @TheRealChipA !

Congrats on the three years of profit, that's huge! It's interesting how for so many people it takes a big crisis to be the turning point to make big changes. It makes a lot of sense!

I love that you create a budget based on the previous year, and that you've been stashing away money accordingly to not be touched for any other reason. I'm so glad that you're setting aside money for you now too -- that can always be a challenge. 

Love the debt freeze idea! The author gets into paying down debt later in the book, so I hope those strategies help you too!

It is so hard as a seasonal business to have enough cash to make it through being closed. I'm so glad that the automatic savings through Square Banking is helping you with that, and that you're adapting by having a separate savings just for that. 

Haha, you're not just any boomer, you're our boomer! We appreciate you tremendously!

[maxpete]

Happy new year and happy reading! 📚

Interested in your thoughts as you start to read the book @Anjoli, @DalagaLJ, @Doran, @GoClutterless, @Lovewell, @Stacelyn24, & @Tamyra_Paunchy!

[Bronze_Palms]

Love this question!

I opened my salon in January of 2021 and have had tried a variety of strategies to capitalize on profits. The one way that has worked for me has been to practice consistency. This means consistency in payroll; I used to increase hours during holidays which would ruin our profits versus allowing the current appointment slots we had available to fill up. I practiced consistency in saving; I set up Square Savings to automate my Sales Tax, Inventory, Mentorship & Education, as well as General Savings so I wouldn't feel so strapped when it came time to pay those expenses. 

The only months we aren't profitable are December and January; our number March - August are incredible (like 200% more) so I have learned that I need to be saving during these times to help out the salon during these quieter months. I still pay staff and give them projects to work on to retain them. @TheRealChipA gave me this idea!

[maxpete]

Another smart idea from @TheRealChipA! 

[Pesso]

Thanks for sharing, @Bronze_Palms !

That's such a good insight about being consistent in all of the ways. Increasing hours does seem like it could be a good idea, so I'm glad that you double checked and realized that it was just cutting into profits more. This sounds like one of the Survival Traps that the author talks about, so it's great that you're no longer doing it. 

How has the saving for the slow months been working for you? Are you able to remain overall profitable for the year even with those months?

[Bronze_Palms]

Great question! We do take a loss December and January, but that is okay because we save SO much during the other months of the year that it is now just the expectation. I could absolutely cut payroll hours during December and Jan so we DONT take a loss, however, I would hate to lose staff! So I am choosing to pay them during those months so I can retain them when we pick back up again. So far so good and staff enjoys the change in pace where we are taking on bulky projects and are less service based.

I am open to ideas tho!!

[Pesso]

That's a really good point, @Bronze_Palms ! Prioritizing retaining your employees is huge and I'm so glad you've been able to do both!

Are there any especially low profit & high cost products/services or anything else that happen either year round or especially in the offseason? 

[Bronze_Palms]

We don't typically add services or products in different seasons. We typically just shift focus from exclusively clients to project based work where we focus on PR, marketing, outreach and planning events for the next year. It keeps the salon dynamic and staff engaged.

[Pesso]

Makes a lot of sense, @Bronze_Palms ! That's a great strategy to maximize your down time to work on improving the business across the board in ways that'll pay off in big ways! Thanks for sharing-

[MattisonCentral]

Straight to the point, we aren't profitable yet! However, we're just entering our second year of business and working on ramping up events to attend in order to increase our exposure and sales. Last year was us just getting our feet wet with some smaller local events, leading up to a large holiday event in November. The success of the November event has given us the confidence to push into some of the other large events happening in our area.

I started reading Profit First in December and have implemented the initial stages of Mike's system. It will be interesting to see how that impacts our operating expenses as we did not have a good reign on that last year. 

Overall really excited for the journey and for the discussions of this book!

[maxpete]

Sounds like you're heading in the right direction of getting to where you need to be in terms of profit! Looking forward to hearing more how these strategies from this book help out your business this year too!

[Pesso]

Thanks for sharing, @MattisonCentral !

Congrats on making it through the first year and into the second! That's so wonderful that events have been working out for you -- best of luck in trying the bigger ones moving forward.

What steps have you implemented? How has it been working for you so far?

We're posting a new discussion post every week, so stay on the lookout and check out this week's thread too!

[CareyJo]

Hey there all!

We have taken profit first since inception because our business is what pays our bills.  I've never paid our suppliers first because if we lose our house, then what good does it do to pay them first?  Unfortunately, as many of you know, Uncle Sam comes knocking and he expects to be paid promptly.  Being self-employed is way harder with this.  Our agreement has always been that our taxes and house payments come first.  Most of you are probably lucky that you only pay taxes monthly or quarterly, we used to pay monthly and now I have to pay weekly.  And with the way the IRS structures it, it's possible to actually pay twice a week, depending on when we paid ourselves.  Budgeting is SUPER IMPORTANT.  We do not have guaranteed income.  I am continuously projecting expected income and on what dates, to accommodate what we owe and to who.  It can be really difficult when we have to pay ourselves too much to meet our needs and not have enough left.  It's a very delicate juggling act.  Not all businesses can function the same and we need to remember that what works for me may not work for you and vice versa.  In our industry, we collect deposits from customers for work and then the statement comes from the supplier the next month.  But we operate on a cyclical basis so those profits are being used first, before the work is done.  Then hopefully the balance the customer owes us replenishes the funds.  It can be really difficult to maintain that when you're ordering equipment at 20-30k per month but can't do the work immediately.  You also cannot pay by invoice.  Suppliers depend on monthly statements and payments to track what you owe.  If you pay each invoice separately, they disappear from those statements and it looks like they never existed.  It's easier to work with bills you owe than the state or the IRS or your mortgage.  Pay yourself first!