The purpose of this post is to help business owners get control of their business. This is a straightforward (simple but not easy) explanation of how this method works.

In Part 1 we revealed the idea about looking at your business financials differently. This totally turns how you look at your income statement (P&L) on its head. Here is Part 1.

It ties back to how we look at the game of business – the old business class equation is:

SalesExpenses = Profits

Using this approach, this mindset means that Profits are what is left over…but human nature drives us to spend what is in front of us, therefore Expenses end up cancelling out Sales, often leaving us with NO Profits.

What if you were to change the equation?

SalesProfits = Expenses

How do you escape the Survival Trap?

This method is basically the idea of using smaller plates for your business. You are tricking yourself that you must make do with less money. It is basically the same idea that a 401K plan works under. When I take the money out up front, I don’t notice that it is gone, so therefore I don’t miss it.

More than just small plates: To really make this work, you need a few additional ideas:

Small Plates – When money comes into your main account, immediately disburse it to other accounts based on pre-determined percentages. Other Accounts? (Profits, Owner’s Pay, Taxes, Charitable Giving, Operating Expenses)

Serve Sequentially – Your Profit account gets served first, then Owner’s Pay, then Taxes, then Charitable Giving, and what remains is applied to your operating expenses.  No exceptions, this is the heart of making it all work.

Remove Temptation: Make it difficult to get into your Profit account, keep it out of sight (at a 2nd bank).

Enforce a Rhythm: Make this into a monthly habit – work your payable accounts 2X per month, on the 10th and the 25th so you can really start understanding how cash flows through your business.

How Healthy is Your Business?

Business owners tend to focus on how big their business is or how fast it is growing. The reality is that growth or size doesn’t mean anything if the owner isn’t pulling money out of the business and keeping a fair share of it. It may be surprising to a lot of people, but many businesses run on the ragged edge, even award winning entrepreneurs spend a lot of time trying to figure out how they are going to make ends meet every month.

That is not healthy.

The Instant Assessment

The first step towards implementing this method in your business is to get a clear idea on where you stand right now, which is where the Assessment comes in. This is a quick overview of your business’s financial health that you should be able to fill out with basic information on your own.

Total Revenue less Cost of Goods Sold (Materials & subcontracts) = Real Revenue

Actual Profits (12 months) less Owner’s pay (actually paid) less Taxes paid less Total Expenses paid (12 months). Net MUST be zero or you missed something!

Now determine the percent of real revenue for each category. Are your expenses too high?

Now determine what your ideal percentage should be versus what it is.

Here are some examples:

Real Revenue Range $0 – $250K $250K – $500K $500K – $1M $1M – $5M $5M – $10M $10M – $50M
Profit 5% 10% 15% 10% 15% 20%
Owner’s Pay 50% 35% 20% 10% 5% 0%
Tax 15% 15% 15% 15% 15% 15%
Operating Expenses 30% 40% 50% 65% 65% 65%

That is it. A quick assessment that will tell you if you are taking out an appropriate amount of Profit and Owner’s Pay (and taxes) for the size of business you have (in Real Revenue). The Target Percentages are based on experience and should be applicable across industries. They are not perfect, but a good starting point. It is also important to remember that these are your target, not necessarily where you are now.

What you DON’T want to do is immediately start withholding your target amounts for a couple of reasons:

  • You likely can’t afford to make a big swing towards Owner’s Pay and Profit without cutting costs and it can take some time to cut costs without putting your business at risk.
  • It is important to experience some success and positive momentum with your new approach and a big change is much more likely to stall out or have to be backed out when an unexpected bill comes up.

Next Steps

Step 1 – Talk to your accountant. You need to get your accountant to buy into your overall plan and there is a possibility that your accountant will fight you on the idea (it will require a bit of extra work on the accounting and money transfer side of things). If your accountant can’t get on board, get a new accountant who can.

Step 2 – Set up your bank accounts: Set up your bank accounts to hold your Taxes and Owners Pay. Create 4 accounts in your primary bank and 2 in a 2nd bank that will be out of sight and out of mind.

Step 3 – Start out easy: Determine what you have been contributing to your accounts (as best you can tell) and increase that by 1% to start with. If you were taking 2% profit and your target is 20%, start by taking out 3% for now. If you didn’t have any profit, start with 1%. The key is to get started and build up the habits.

I know you can do it!