Step 2: Making Profit Your #1 Prority!
If I followed you around for a day, what would I see? What would be your focus?
Would you be spending your time on details, scheduling staff, writing proposals, meeting with customers, writing your public releases, doing your accounts, targeting new business, calling suppliers, delivering your product/service, completing the paperwork, answering the phone, designing new ideas/products?
Do these activities make you profitable?
There are two main reasons to own a company.
- To have an enterprise where you get paid a reasonable sum for the work you do, make a decent living, and have the freedom of not reporting to an employer.
- The other reason to own a business is to make a profit for the time, energy, and risk you take.
After presenting at a seminar, a business owner approached me for advice. He said he was over-worked, stressed out, hadn't paid himself in months, having trouble collecting money customers owed him, trying to find time to do the required paperwork, and continuously trying to find new clients and… he hadn't taken a vacation in years.
I asked him to tell me his average profit margin, overhead costs, his breakeven point, equity, working capital, acquisition cost of a new client, targeted cash flow over the next 4 weeks, his budgeted sales and profit over the next 6 months and his available line of credit at the bank.
He looked at me like I was from another planet!
It was obvious he had started his company with little money and knowledge and expected to build a business without the basics in place for growth. It seemed there wasn't any hope for him to make a profit as he wasn't focused on the most important part of a business - the numbers.
In my last article, I explained step one of The Business Success Blueprint: Build an 'On-Purpose.. .On-Target Business!' Start any journey by figuring out what you want. It was obvious this business owner hadn't taken step one and listed out the things he wanted his business to do for him and what it would take to make it happen. Step two in building a successful business is to focus on your bottom-line numbers and always make sure you make a profit.
Are you a Kando Business Owner?
Many small/medium sized businesses owners just want to work for themselves and like being in control of every decision, detail, and part of their business. They don't delegate much and really don't like employees or customers. They like to stay small and don't want to grow and get any bigger. In reality, these businesses are sole practitioners and may only have a handful of employees and customers. There is nothing wrong with these businesses.
Kando Business Owners, on the other hand, are business owners who want to grow their companies and create an organized and systemized business that works for them. It is employee run, has great loyal customers, makes a robust profit, and creates wealth.
What do you think Kando Business Owners spend the majority of their time on?
They are focused on making and maximizing PROFIT.
They learned long ago that details, commitments, hard work, and micro-managing doesn't result in profit.
Profit is the result of staying focused on making money in everything you and your employees do. Know your numbers, make them a priority, and do everything you can to hit your targets. Kando Business Owners know that cash, capital, and equity are the lifeblood of their future. They are `Profit-Driven.'
Are you Profit Driven?
Take this true or false test to determine if you are Profit-Driven:
1. I know the profit targets on every job.
2. I know our fixed cost of doing business.
3. I know our exact annual overhead costs.
4. I know our annual breakeven revenue.
5. I know our net profit year to date.
6. I know our annual gross profit goal.
7. I know our annual net profit goal.
8. I know how much cash we have in the bank.
9. I know what our company working capital is.
10. I know what our company equity is.
11. I know our annual equity growth goal.
12. I know what our current receivables are.
13. I know what our current payables are.
14. I know what our total debt is.
15. I know our projected monthly cash-flow.
16. I know what our equipment costs are.
17. I know our average gross profit on every job.
18. I know what a good profit margin should be.
19. I know how to read our monthly management accounts.
20. I know how to maximize our bottom-line profit.
How did you do? Do you have any false answers?
Profit-Driven business owners, entrepreneurs, and managers usually have at least 15 true answers out of these 20 questions.
People who have less than ten true answers are not focused on making a profit. Their priorities are on surviving, keeping busy, getting the work done, and then getting more work to pay their bills with.
You can't get your business to grow without making a profit.
Profit allows you to build a company. The more profit, the faster you can grow. Profit allows you to invest in people, systems, equipment, training, customer service, knowledge and technology. Without a good profit margin, your business struggles and can't get moving towards achieving your business goals.
Profitability is the best indicator of your:
- Company organization
- Management systems
- Service
- Scheduling
- Quality workmanship
- Customer focus
- Marketing
- Sales
- Leadership
- Priorities
- You and what you want
Are you Volume Driven?
Many business owners focus on volume and staying busy. They go for more work instead of profitable work. They take what comes in the door and compete against too many cheap competitors who don't know how to make a profit. They don't offer anything different than their competitors, so they have to sell low price. This causes them to take on more work at too low a margin to cover their costs. More volume is addictive and keeps you on the treadmill going nowhere. And this eventually results in not enough profit to sustain business growth.
I am not impressed with company owners who brag about how long they have been in business or how busy or how big they are. I want to know how much profit they are making! Your goal is not to be busy. Your goal is to make a HUGE profit!
What is your top priority?
Do you make your people accountable to hit their numbers? Do you know your numbers and what it takes to make a profit? Make sure each member of your team knows exactly what their target is. Be as specific as possible. Eg The actual sales calls to be made by John in week 1 of Month 2 etc. Make the targets measurable and ensure your staff are appraised according to their targets.
Do your look for profitable customers, markets, and projects where you can make HUGE profits?
Kando Business Owners know what they want. They want to make a big profit! And that is top priority!
You need precise profit targets and clear goals for your people, projects, and customers.
Shoot for a specific return on equity and a return on your energy invested.
Identify the type of projects you excel at, the market in which you flourish, the maximum and minimum job sizes you manage best, and your own capacity. Decide when to say "Yes!" and more importantly, when to say "No!"
What is profit?
Being a qualified Chartered Accountant does help me know my numbers. I teach Kando Business Owners to know their numbers too. They know what it takes everyday, every month and on every job to make a profit.
- Profit is return for the risk you take in business.
- Profit feeds and supports business growth.
- Profit is a reward for running your business professionally.
- Profit can be split with key employees as an incentive.
- Profit can be used to help you through tough times.
- Profit allows investment in an exciting new venture.
- Profit is the outside indicator of how well you run your business.
- Profit shows you how much money your money makes.
- Without profit, your business can't thrive and prosper.
Profit is the financial gain or return from the use of capital in a business. Profit is the sum remaining, after all costs, direct and indirect are deducted from the income of a business. This assumes you have income or revenue and have collected it. Most business owners start their business with capital or a cash investment and still have some left - this is the equity in your business.
Equity is also the value your company is worth if it was for sale.
Direct costs are your direct job costs or the costs of doing the work you have been contracted to complete.
Indirect costs are your fixed costs of doing business which include your overhead, management, office, and administration. Overhead costs continue on whether you have any work or not.
Get focused on profit building!
What do you want, more volume or more profit?
Get into the profit building business. Seek projects, customers, managers, and employees who are focused on making us lots of profit. Seek opportunities to increase our equity and build wealth instead of staying busy and competing on price. Is your business focused on your future?
If you were an outside investor, would you invest money in your operation? What bottom-line return would you want?
I bet it is more than 1 or 2% pre-tax net profit.
Magic of making a fortune
The magic of making lots of profit starts with making lots of money!
To build a profitable business takes focus and tough decisions.
I am in business to make a HUGE profit and grow my wealth. When you have a fortune you can share it and give back to others. You must be the leader and set the example. Focus on making a profit, hold people accountable, delay marginal buying decisions, say no to tempting jobs that look risky, don't let people waste money, let go of your poor performing employees quickly, know and watch your numbers, know your break-even point, watch your cash-flow, seek big profit customers and projects, be firm and tough on suppliers and subcontractors, and get profit building. You know what you've got to do to make a profit.
In the next article of this series, I discuss
The Installation of Financial Systems & Controls
A fully integrated accounting software package with profit and loss statements, balance sheets, job cost reporting, cash-flow projections, accounts receivable and payables aging are required. Secure a bank line of credit and establish a bonding relationship to grow a profitable business. Install financial controls to ensure accuracy and accountability.
But for now, take the first step and start working differently - get profit driven and get to know your numbers.
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