x
Admin

Why Profit is Important and Why Many Businesses Aren’t Profitable

Hey Square Readers, 

 

We hope you’ve started to dive into reading Profit First by Mike Michalowicz!

 

As we begin, let’s first lay the foundations for the Profit First plan by looking at what profit actually is, why it’s important to be profitable, and the reasons why so many businesses don't reach profit.

 

The Survival Trap:

Pesso_0-1704825186524.png

Why Profit is Important:

The author writes, “What I’ve found is that the fastest, healthiest growth comes from businesses that prioritize profit. And it is not because they plow money back into their businesses. Businesses that plow back their profits aren’t truly profitable; they are just holding money temporarily (feigning profit), then spending it, just like any other expense.”

 

The author lays out the difference between Accounting Profit and Real Profit. He gave the example of his accountant giving him his annual statement showing that he made $15,000 in profit, but that he spent it on expenses. Technically there was profit, but in reality, if you spend it on the business, is it really profit? 

 

Real profit is operating without debt, and maintaining continual cash reserves after all of your expenses. Profit can be used to distribute to owners/shareholders, to fund the business in case of emergency, or in a select few other cases.

 

Why Your Business is Not Profitable: 

The author talks about the Survival Trap, where business owners go through cycles of:

  1. Being in a crisis period of having very little money in the business accounts
  2. So they try a lot of different strategies to bring in extra money
  3. Which brings them into a period of big sales and income
  4. So they end up spending it all to pay expenses
  5. Which brings them back into a crisis period with very little money 

 

Not only does this make your business unprofitable and adds extra stress to your life, it also pushes your business further away from its actual vision and purpose. 

 

Why Profit First:

One of the main goals of Profit First is to be able to avoid this Survival Trap. By enacting Profit First, businesses can end up being consistent with the amount of money that they have, and also by making business decisions that keep you in line with the vision of your business. 

 

This is done through being aware of how you spend your money, putting money aside for each of your spending and savings goals, and cutting down on spending along the way.

The author says, “When you take your profit first, your business will tell you immediately whether it can afford the expenses you are incurring; it will tell you whether you are streamlined enough; it will tell you whether you have the right margins. If you find that you can’t pay your bills after taking your profit first, you must address all those points and make the fixes.”

 

Next week we’ll dive into the heart of Profit First: the core principles and the first action steps of how to enact the Profit First plan!

 

We’d love to hear your answer in the comments:

  • What does profit look like for your business? What do (or would) you do with your business’s profit? 
  • Have you been in the Survival Trap? What have you done (or are currently doing) that has brought in more money but not profit? Which of them would you stop if you were profitable? 

 

Feel free to share any other thoughts you have about this book. We can’t wait to hear your thoughts in the comments below!

 

View and Subscribe to all threads about this book.

 

Happy reading,

Pesso

4,144 Views
Message 1 of 22
Report
21 REPLIES 21
Admin

Personally for my business, we fell into so many Survival Traps. Our business was originally seasonal and closed in the winter. We shifted to being open all year, and while we were able to bring in more money, it was harder and harder to stay profitable during those months. Eventually after 10 years, we shifted back to seasonal and ended up being more profitable. We also tried hard to expand our product offerings so many times -- adding in frozen yogurt, going all the way up to 123 flavors, trying out hot food. All of them just added to our expenses and reduced our profit. Of course, as soon as we decided to abandon those efforts and focused on what we knew and did best at, everything went a lot better!

3,941 Views
Message 2 of 22
Report
Square Champion

This is where I hope to be; going back to what we do best and being hyper-focused on it. We just closed the retail side of our business in order to focus on all of our custom/pre-orders that have been increasing again post-COVID. Retail was sucking the soul out of us, not to mention the actual money we lost because of it. Really hoping this slow down in order to make more money will be just what we need. 

Ali Kenis

Sugar Lab Bakeshop

Follow me on Instagram

Celebrating Since 2012
3,888 Views
Message 3 of 22
Report
Square Champion

Funny how so many of us had to switch to retail during covid!  I had a good experience with it and enjoyed it but the cost now just is too high.  Plus, my daughter was younger then.  She came to work with me saving me childcare headaches.  It was great.  We both loved it.  Now that she is in school 30 minutes away I don't have the ability to sit there all day and work the retail.  She also hates going to the store now.  Even Saturdays are hard because she asks if it is time to go every 7 minutes.  My service appointments work better now that she is in school all day and I have to schedule around that.  And if I'm being really honest with myself.  The service part of my business makes more per hour and in less hours than the retail ever did.  

Doran

Esthetician
Haute Beauty Guide
3,804 Views
Message 4 of 22
Report
Admin

It's so interesting, @Doran ! Such good points about the added expenses and time, and being able to take back your schedule and make better use of your time without retail! Love it the efficiency and better $/hour ratio!

3,446 Views
Message 5 of 22
Report
Admin

I love this, @sugarlab ! Focusing on the core of the business is a great plan. I'm glad you were able to cut back on the things that were adding more stress and expenses, and can continue doing what you love!  Keep us updated!

3,447 Views
Message 6 of 22
Report
Square Champion

Early on I got stuck in the survival trap.  Bad business advice from another stylist in my first salon setup led me to have a service menu that rivaled the Cheesecake Factory!  But after scaling down to two things I was great at and loved doing changed profits for me.  I couldn't use that many back bar supplies before it expired and was bleeding money on having to replace it every month.  It didn't matter how many clients came in the door they weren't all there for the same thing and products were just thrown out.  It also made it hard to be known for any one thing that would bring referral business in regularly. Now I really stick to the two things I do well and am known for.  

 

During the pandemic, I also switched to a more retail-heavy model since services were all out illegal for 18 months.  That was great for me.  I was able to stay profitable but now with the economy change, less of a shop local push and my street shut down I'm looking to go back to more service-based.  The upfront costs are less and the services were always my why.  

 

Lately, I've toyed with the idea of getting a bigger building and renting out suites to other stylists.  But this book is making me think that isn't smart for me.  I've never really wanted that but the idea of the revenue is appealing.  Let's see how I feel when I finish the book. 

Doran

Esthetician
Haute Beauty Guide
3,805 Views
Message 7 of 22
Report
Admin

That's incredible that cutting down on your offerings helped not only your profit but your enjoyment of the work and business, @Doran ! It's so much more efficient, and can be much more fun too. 

 

Expanding can definitely be a step to take, but I agree -- focus on maximizing what you have now for a good chunk of time, analyze the options, and then look into it again. I think sticking to what you have and continuing to work on increasing profit is a great plan!

3,448 Views
Message 8 of 22
Report
Square Champion

I recognized the funnel of doom last year going over my numbers.  While my sales numbers have doubled each year, my expenses also doubled.  I was never in debt but looking at my spreadsheets, I was questioning how long this was sustainable.  Last year my accountant remarked, well at least you are breaking even.  Sigh.  Reading the first two chapters of the book very much described my business.  Honestly, I can't work any harder so in a roundabout way, I was already recognizing there was something not right.  I just couldn't quite put my finger on what it was until I started reading this book.  Talk about being at the right place at the right time.  

 

Ok, on to chapter three.  

Bonny Wagoner
3,736 Views
Message 9 of 22
Report
Admin

Thanks for sharing, @bonny -- I'm so glad that reading this book has helped you recognize on a deeper level what's going on in your business. I can imagine that must have been very frustrating to have worked so hard to double your sales, only to realize that the expenses doubled too.You're right, breaking even is definitely better than losing money, but it's still a thing to work on and solve. I can't wait to hear what you come up with and implement, and how it affects things for you -- keep us updated!

3,448 Views
Message 10 of 22
Report
Square Champion

The self-assessment was, in a way, painful to look at but if I was being totally honest, also expected.  I had to go back and reread chapters 4 and 5 to make sure I thoroughly understood what I was reading so I can implement the needed changes.  I've added book darts on the pages I know I will have to refer back to and I'm now in the process of putting everything in place to change the outcome going forward.  

Bonny Wagoner
3,305 Views
Message 11 of 22
Report
Admin

Thanks @bonny ! 

 

It can absolutely be hard to confront the numbers, but I'm so glad that you took it to heart, went back to read more, and starting to make changes! I love that so much!

What are you planning and starting to put in place to make things better?

3,257 Views
Message 12 of 22
Report
Square Champion

I had to give this some thought so I had a plan of attack, so to speak.  I'm going to do a deep dive on my numbers to identify which products bring in the most sales, which SKUs are falling behind and potentially eliminated unless there is a compelling reason to keep them active.  Also note the development costs for each SKU. Reading the book reminded me I need to do hard cost evaluations so I can make more informed decisions.  

January/February is my slow time of year (usually pretty dead saleswise) but there's still tons of prep work that has to be done to get ready for the upcoming farmers market season.  I set up the five dedicated accounts and have already put them to work.  Mike is quite right... seeing a profit is addictive.  

Bonny Wagoner
2,969 Views
Message 13 of 22
Report
Admin

I love that you're taking your time and making a plan, @bonny ! 

 

That kind of cost evaluation is such an important process to run, to really understand the numbers and get a baseline feel for how your business & each product/service is performing. And then from that determine what to cut or make more profitable (either by raising prices or cutting costs). 

 

So wonderful to hear that you set up the accounts and are seeing the profit coming in, and that it's got you hooked!

 

I'm glad you have the time to prep and run the numbers and I can't wait to hear what decisions you end up making! Definitely keep us updated as you decide-

2,917 Views
Message 14 of 22
Report
Square Champion

That first question is a tough one, only because it has two answers for me.  Profit for us is whatever is “left over” after the month is closed.  But it is complicated by the fact that it is NOT what is shown on the bottom line of my P&L.  Since I am in the process of freezing and paying down debt, there are cash-eaters out there that only show up on a Balance Sheet and/or Cash Flow Report.  After all, the process of paying down debt (excluding interest which is reflected on a P&L) means I am paying off something I’ve already borrowed and spent.  This makes my P&L look so much better than it actually is in real life.  So, I’ve decided to use more of a home-grown cash flow statement which is my P&L profit/loss less any cash used to pay down debt balances.

 

Honestly, I’ve never understood the benefit of a P&L bottom line precisely because of this issue.  Sure, it tells taxing authorities how much I might owe them, but otherwise it is a rather useless number.  (As a side note, this is yet another reason why debt should be avoided at all cost.  It not only costs us money in interest and fees to borrow, but then it impacts our cash flow and ultimately our real profit for too long a period of time.). Anyway, by the end of this season, I plan to have reduced my debt by 40-50% which will be amazing it if works. Obviously, the business can handle that debt load as it exists now, but it shouldn’t need to do so.  There are better things I can do with that cash, especially putting it in my own bank account since (as a pass-through LLC) I’ll be personally paying the taxes on it anyway.

 

What do I do with profit as shown on a P&L?  Pay myself first (Piper’s is a partnership/LLC and so I can’t pay myself via payroll), continue to pay off my now-frozen debts, save for the off-season bills and unexpected expenses and hopefully have a little left over to either pay myself more or plow a little back into the business if needed.

 

I’m trying to imagine any small business owner who hasn’t experienced the Survival Trap numerous times!  In my case, the pandemic shutdowns revealed to me the folly of chasing larger and larger gross sales hoping that this would eventually reach a tipping point to amazing profit and wealth!  As has already been said by others here, the pandemic taught me that more and more sales from insane diversification and expansion was not the answer and, in fact, was the problem.

 

It took us a while to completely learn that lesson, however.  After the shutdowns, we exited the food business and that was the best decision we ever made.  Post-pandemic, the food business is too expensive and getting more so every day.  To truly price menu items that ensure a living wage for all employees without tips (which is where the business is heading, folks!) means that eating out can never be viewed again as something that is inexpensive.  It can’t be inexpensive, and it shouldn’t be inexpensive.  But, after having learned that lesson, we thought that “maybe” we could make a go of adding a new product line in “adult” shakes and such.  It was a great idea but in the end it was yet another diversion from our business model.  Getting rid of it eliminated $30k in gross sales and $40k in expenses (with me being the full-time bartender!).  You can do the math.  We more than made up the reduction in gross sales by the increase that came from focusing on our core business model, and in this case the expenses are so much less.

 

Besides the obvious of being able to pay ourselves, profit is important because without it there is no point in owning a business.  That is just hard, cold reality.

Chip

If my answer resolves your issue, please take a minute to mark it as Best Answer. That helps people who find this thread in the future.

Piper’s Ice Cream Bar, Covington KY USA
Website
Facebook
Click here to see a list of third-party apps I use to add functionality to my Square account!

जो है सो है
3,701 Views
Message 15 of 22
Report
Admin

Thanks so much for sharing, @TheRealChipA !

 

That is such a good point -- P&L and accounting statements definitely don't reflect the reality of business cash flow for these and so many other reasons! Rooting for you on getting the debt down to the point that you're aiming for! I love that you're taking the profit and your pay, too!

 

Very true on the understanding that product diversification and more sales can lead to lower profit, and that's amazing that you took the jump out of food and it ended up so well for you! It's definitely super expensive in product and labor, and really not sustainable for you -- as well as the alcohol side of things. Love those savings! 

3,451 Views
Message 16 of 22
Report
Square Champion

I'm so glad we're reading this book...it literally will open up a lot of eyes like it's doing mine; and you'll see that we may have been doing it wrong for some years now.  Never fret...I'm in the learning stages of placing my profit first because it's definitely a foreign concept to me that I'm learning and trying to adjust into the business.  I have a few things that need to be sorted out; afterwards I should have the true numbers of our business.  It looks great on paper but when you pull out your bank statement and you're like "where is all my money?!"  Then it really starts to put things into perspective.  This year for 2024 I'm determined to make the business profitable and not just breaking even!!!!

3,661 Views
Message 17 of 22
Report
Admin

Thanks for sharing, @Stacelyn24 ! I'm so glad that this is giving you a new perspective and that you're making a plan to figure out your numbers and get on a path to profitability! 

 

That's definitely a big thing that the author talks about: true profit can be seen in your bank account, so setting up your accounts to reflect it is key. 

 

Definitely keep us updated on your progress -- we'd love to hear how it goes! 


I just posted the Financial Instant Assessment so that's a good place to start too-

3,558 Views
Message 18 of 22
Report
Square Champion

Ahhhh the survival shuffle - We are at the point at MudFire that profit goes into a savings account weekly before I even see it and we are each getting a salary and saving actively to purchase the building we currently lease - we don't have any debt now. At the beginning that was not true and I had taken out a huge loan and we owed the promissory note for buying MudFire - all because we had a business that was in survival mode and literally I can say we did everything on the above graphic - our supply business closed in 2014 after a survival battle of doing all of these things - I even totaled my car and used the check to pay employees instead of getting a replacement car that was actually decent. 

At MudFire I came to the equation with this survival experience already in my pocket - I tried to make decisions based in numbers and not in what I felt we should do - which at first was very difficult. Cutting expenses is no joke, but now we are here and I am grateful. This book really resonated with me and allowed me the permission to create a business savings and that having profit didn't mean that we weren't giving enough back.  @TheRealChipA you are 100% w/o profit there is no business and that is a reality.

Glad to see this convo happening here @Pesso 

Deklan (Dex) they/them]

MudFire CEO | Square enthusiast

Visit me at MudFire online
3,504 Views
Message 19 of 22
Report
Admin

Thanks for sharing @MudFire_Dex !

 

It's so easy to get caught in it and just pushing forward without actually getting ahead. That's so wonderful that you've been out of debt and setting aside profit and salary consistently! Congrats!

 

I'm so glad that the book is landing for you and you're moving ahead despite the challenges!

 

I'd love to hear more about your expense cutting journey too -- What did you cut? How did you determine that and decide how much?

3,454 Views
Message 20 of 22
Report
Square Champion

Sorry so late in reply - Here are a few things we did and hopefully people can pull from.

Some things we cut post pandemic:
* a refrigerator for members (it created extra work - was older and inefficient and created an issue for us to provide sodas/waters for a fee that we constantly lost money on - it doesn't sound like much but averaged $80 a week just in the waters and soda but over the course of a year it cost us a little over $4K)
* water delivery - I installed a tap that filters water - for an additional savings of $200 a month - $2K
* switched to subscriptions for staples like TP, paper products, soap (saved me running errands and up and down pricing) savings of a few hundred a month
* changed our hours of operation to different days and times post pandemic to allow more date/event scheduling while still providing members access to the space 6 days a week for a total of 57 hours per week. Adding the additional appointment slots allowed us to capture an additional $2K per weekend without upsetting members because we added after work hours - this one was huge and netted us nearly an $80K increase in income in one year technically by cutting member access on weekends (this one reminded me of the ice cream shop hours and availability conversation).

Some things were initial costs but paid for themselves:
* LED fixture replacements for our overhead lighting in the kiln room, break room, gallery, and studio (paid for themselves in 3 months and now represent a savings of $500 a month.

Deklan (Dex) they/them]

MudFire CEO | Square enthusiast

Visit me at MudFire online
3,084 Views
Message 21 of 22
Report