Hey Readers,
Weโre getting close to the end of Profit First by Mike Michalowicz, and weโre starting to wrap up the material. So far weโve talked about profit basics, the principles and first action steps, figured out our savings goal percentages, and learned ways to cut down on our expenses.
Don't forget to RSVP to our Live Discussion on Tuesday, February 27th!
Today, weโll talk about the final steps, working on some advanced ways to increase profit and adapt the Profit First system to your business.
Fire & Clone your Customers
The author talks about two things to keep in mind about your customers in order to get and stay profitable. The first is to fire your bad customers. Weโve talked a bit about this concept in previous Book Club books, and the focus around profit is a good one.
The author writes, โAll revenue is not the same. If you remove your worst unprofitable clients and the now-unnecessary costs associated with them, you will see a jump in profitability and a reduction in stress, often within a few weeks. Equally important, you will have more time to pursue and clone your best clients.โ
He cites some studies that say โthe top quartile [customers] generated 89 percent of the total revenue, while the lowest quartile only accounted for a meager 1 percent of total revenueโฆ each group of clients required pretty much the same amount of effort (cost and time). This means that it took the same amount of effort to serve a big-revenue client as it did a client who barely affected revenue at all.โ
The other lesson from this is to clone your good customers. If 89% of your revenue comes from just a few good customers, you want to figure out who those people are and get as many new folks that are as similar to them as possible. Having similar customers with similar needs can make you super efficient, and if those are great customers then youโll be super profitable too.
Michaelowicz writes, โYou will become superefficient, because you now serve very few but consistent needs, rather than an excessive array of varying needs. You will love working with your clones, which means you will naturally and automatically provide better service. We cater to the people we care about. Marketing will become automatic. Birds of a feather flock together (for real) and that means your best clients hang out with other business leaders who have the โbest clientโ qualities youโre looking forโฆ You love them and they love you, and that means they will talk you up every chance they getโฆ Find them. Nurture them. And then find out where even more best-client clones hang out and cultivate them, too.โ
Customize the System
Once youโve been using the Profit First system for a while, you might find some gaps and ways that you can make it work better for you. Thatโs part of the process! Customizing it to fit you and your business is key to making it work.
The author says that the biggest way to do this is by adding more accounts. Further splitting up your money into the categories that you tend to spend in, and need more help saving towards, is the way to make Profit First work better for you.
One of the first extra accounts he recommends is a Vault or Emergency Fund account. He suggests aiming to have a consistent 3-month reserve of all of your expenses into this account, so if something drastic happens, you can keep everything going for a while.
He does caution that this emergency account needs to be for absolute actual emergencies. He says, โWhen you set up the Vault, you must also establish certain rules for its use. What I mean is that when you have a situation so dire that you need to access this money, you also have instructions written in advance on how to proceed.โ
Some of the other accounts he suggests opening can include: Big Purchases, Payroll, Petty Cash, Sales Tax, and absolutely anything else that works for you!
Document Your System
In order to make everything as smooth as possible, run the numbers to figure out exactly how much you need to deposit every 15 days and thereby every year in order to profit and pay everything and everyone. This will help with your transfers and for figuring out your total numbers for expenses and profit.
Finally, once youโve gotten into the groove, the author recommends that you write down the details of your system. This way you have it on hand for easy reference both for your regular transfers and for when you need to tweak the system. Itโs also good to have it all written down in case you want to show your accountant, or for others to follow just in case youโre out of commission for a bit, or if you end up bringing someone else in down the line to manage your finances.
Weโd love to hear your answers in the comments:
- What are your worst customers like? What are your best customers like?
- What extra accounts are you adding?
- How else are you customizing the system to fit you and your business?
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Happy reading,
Pesso
