Let’s talk about profit.
Really Mike, now? Is this the time to discuss profit?
Definitely.
Why should we talk about profit? Because in light of the coronavirus pandemic, some business owners are burning through cash to run “business as usual”. As Covid-19 cases increase, you worry whether or not your business can sustain a recession that will be triggered by this pandemic. You want to have profit during the coronavirus crisis because you want to have a solid foundation in your business now. It’s also necessary to have a solid foundation when the pandemic is over so your business will be better positioned for success.
As I write this, I am working tirelessly to provide as many resources and guidance as possible in order to extend a hand to you in service. One of these resources, unbeknownst to me while writing it, is my next book. Fix This Next. I wrote the book over the course of five years, during which I never could have imagined we would be in this current crisis.
I am, however, grateful that I did write it and within it created a diagnostic tool for your business called The Business Priority Pyramid (The BPP). The BPP is the compass to help you determine the vital needs of your business, and the compass to help you navigate to which need you should focus on first.
Enter profit, the second of the base levels in The BPP. Profit is the creation of sustainability. Now, it is commonly misunderstood that profit means making money, when in reality, it means taking money. Profit is the reserve you can use in any way you require, and it won’t hurt your business.
Without profit, your company will constantly be teetering on the edge of going under. When you master the profit level, you bring fiscal health and sustainability to your company.
There are a lot of ways we can discuss profit, but let’s apply it to the current situation. For your business to survive a crisis it must be able to retain cash. Many businesses revert to sales when in reality they should focus on creating profit, because profit is what insulates your business during these times of a crisis. That retention of cash gives you a runway. Depleting the funds from your profit account is not running business as usual, it simply gives you time to look at the data significance. Ask yourself, do you have enough data to point out that you are having an actual problem and you need to take action? Or, is your business running as it normally would?
The thing is, if you don’t see money coming in, you react without having data significance, and it’s not a good move. It is best to use your cash reserve to get through the crisis you are facing – usually a period of two to four weeks is enough for most businesses. In that time you can determine from your data if there are trends, if your business is a risk, and if you need to take action and revisit your costs.
In Fix This Next I explain that a common occurrence is that business owners often have a profit problem but are focused on sales. Remember, it’s more important to bake profit into every transaction you have. Sales do not translate into profit because we, as humans, spend what we make. If you are smirking that you already know this because you read and implemented Profit First, then you know what I’m talking about. You need an efficient system in place to bring profitability around.
To determine whether or not profit is one of the problems you should be focused on, I’m going to give you another sneak peek at the 5 CoreNeeds – this time, at the profit level within The Business Priority Pyramid:
Need 1 – Debt eradication – Do you consistently remove debt or do you accumulate it?
Need 2 – Margin health – Do you have healthy profit margins within your offerings and do you
seek ways to improve upon them?
Need 3 – Transaction frequency – Do your clients buy from you instead of the other guy?
Need 4 – Profitable leverage – When debt is used, is it used to generate predictable and increased profitability?
Need 5 – Cash reserves – Does your business have enough cash reserves to cover all expenses for three months or longer?
Once you’ve fixed the right problem you start reviewing The Business Priority Pyramid again from the bottom up. Using the BPP will ensure you are creating a solid foundation for your business, you simply have to focus on the fundamentals.
