Profit

Profit First

I have an apology on behalf of all accountants – we have been getting it wrong for far too long and we are all sorry; profit first is the way forward.

This is WRONG:

Sales – Expenses = Profit

This is RIGHT:

Sales – Profit = Expenses

Business owners often leave themselves last. We take home whatever money is left over after all other expenditure; we are often first into work and last to leave, and as a result we are the one’s that think about our work life balance last.

Not anymore, as we share some core principles to help you turn this all around by putting yourself and profit first!

Four Core Principles

The four core principles to getting right what you previously got wrong in your business are:

  1. Use smaller plates
  2. Serve sequentially
  3. Remove temptation
  4. Enforce a rhythm

Using smaller plates

As human beings we have a habit of being able to justify more of something quite easily.

How is it that we can fill a 4-bedroom house having moved from a two-bedroom small flat? (or it that just me?)

Why do we need a large SUV when the average car journey is just 8.4 miles?

More importantly, when we try to cut down on something, it is often difficult to sustain it.

For example, it is really easy to say “I am going to start eating less” and it can be easy initially but tough to sustain.

From a financial perspective, it might be easy to make savings initially but how long can you keep it going?

The same can even apply to time.

However, we can often be resourceful when we want to be.

So consider this:

“If you want to eat less, use a smaller plate”

How long do we all make that last bit of toothpaste last when we come to the end of tube?

Apply this thinking to business:

  • Reduce your budget in areas of expenditure and measure both how much you can save and what impact this has elsewhere
  • Reduce your working hours and keep track of whether you can actually get more done in less time – if you do then stick with it

Serve sequentially

I don’t know about you, but I love a good Sunday dinner and I can promise you that two things I never leave are the roast potatoes and the Yorkshire pudding.  I can also pretty much guarantee that if I leave anything it would be the vegetables. Until, of course, I became a parent and realized I must set a better example!

For those who have kids, you will have heard them claim to be full and as a result are unable to eat certain things on their plate. More often than not, it is the vegetables. Particularly sprouts!

Consider this:

“Eat the contents of your plate in a different order and see what (and how much) is left when they are full.”

If we consider this from a business perspective and go back to the formula we shared at the start:

Sales – profit = expenses

From sales revenue that we receive in, we first take out a calculated amount of profit and then start to manage expenses. When you take this profit first approach, it is interesting to see how much more effective we are at managing expenses within a finite budget.

Remove temptation

As humans we are drawn to things we know we shouldn’t have. It is human nature.

If something “bad” is visible or easy to reach, we are far more likely to succumb to it.  I always tell my wife to not buy crisps or sweets because then I know I won’t touch them.

The same goes with time. I have been notoriously guilty in the past working beyond 5pm simply because I can. I “allow” tasks to take longer, and I “allow” myself to start more work than is actually necessary.

You can spend more on “running expenses” and work those extra hours but it will mean you have less money to take home to spend on the family. And because of those extra hours worked, you miss another bed-time and meal time with the kids.

Try focusing on the following:

  • Go through all your expenditure and entirely cut out anything that you don’t need!
  • Track how you spend your time in an average week and identify things you either don’t need to do or could spend less time on. Aim to find 5 hours in total.  Follow my “D” rules when assessing time:
    • Ditch the task
    • Delegate it to somebody else
    • Do it if it really needs to be done by a certain time
    • Dither – please don’t – you’ve cost yourself enough time and money already!

Enforce a rhythm

Feel the rhythm, feel the ride, get on up, its bobsled time!

*That will be the only reference I make to the film Cool Runnings.

It is all good and well having a routine/rhythm but what if somebody trips you up in the 100m sprint and you miss the Olympics because you didn’t take aversive action? (**definitely the last reference to Cool Runnings!).

Feel the rhythm

To truly make sustainable changes in your business you must put in place a sustainable rhythm that can withstand several bumps along the way.

Once you get things right, you need to recognize them and repeat them more often.  When you get things wrong, don’t dwell on it but instead reflect and learn from it but don’t repeat them.

Now you’ve got the four core principles to putting profit first:

  1. Use smaller plates
  2. Serve sequentially
  3. Remove temptation
  4. Enforce a rhythm

We would love to hear what changes you implement based on the ideas in this post and the difference it has made in your business and personal lives.

Marginal gain %

Marginal gains – 1% can be all that it takes! (Part 1 of 2)

When Sir David Brailsford took over the British Cycling team in 2002 as performance director, we had only won 1 gold medal in our 67-year history.  Add to that, in 110 years, no British cyclist had ever won the Tour de France and top bike manufacturers refused to sell bikes to the team for fear that it would damage the company’s reputation!

All of that changed from 2004 onwards when the British Cycling team won two golds at the Athens Olympics followed by 7 out of 10 gold medals at both the Beijing Olympics in 2008 and London in 2012.

British Cycling riders then went on to dominate the Tour de France, winning six of the following seven Tour De France.

Improve component parts

This extraordinary success has been well documented but how did they achieve it?

Sir David Brailsford was credited with introducing one the most talked about ingredient of this success – the philosophy of ‘marginal gains’. By breaking down everything that went into competitive cycling and finding ways to make small, 1% marginal gains to every component part, an aggregated increase in overall performance was achieved.

Marginal business gains

What worked for the British Olympic Cycling team can also work for you and your business.  Not by breaking down everything that goes into competitive cycling, but by breaking down everything that goes into running a successful business and finding ways to make small, 1% marginal gains that lend towards success.

We have been practicing this philosophy in business ourselves for several years and we bring the approach to life in the different elements of our ‘Insight’ client support package.  Brailsford used data to analyse and redesign the bike seats to make them more comfortable, whilst discovering that rubbing alcohol onto the tires would give a better grip. He re-imagined the secondary impact that small actions could have.

Reimagine your business insights

Now imagine you started looking at your numbers slightly different and made some minor changes to the way you think about them i.e., rather than looking at staff as an expense, consider them a knowledge base upon which you can quickly establish flaws in processes that with improvement, could improve profitability.

We applied this scenario to our own business by internally drilling down to profitability per transaction for work completed. But we didn’t stop there, because we went on to look at the staff member doing the job, the industry in which the client was based, the nature in which the work was received and time of the month it was received i.e., was it always at the end of month?

There were so many areas ripe for subtle changes right at our fingertips that might be otherwise be ignored because of their minimal isolated benefit. But by combining multiple improvements together, the impact began to feel more monumental.

Facing realities

We had to really challenge ourselves as well and face some brutal realities. For example, by tracking phone calls we were able to identify and develop significant improvements to the way clients were handled. By enabling the team to answer queries at the first point of call, we gained both time and cost efficiency as well as alleviating the frustration of being passed around for the client – just being honest! We also started adding more answers to the most commonly asked questions on our website to reduce phone call volume and move towards the ambition of delivering a hybrid 24/7 service for clients for time when the office is closed.

Where are your 1% improvements?

What information do you already have at your fingertips which; with some assistance, you could turn into 1% improvements in your business? Sometimes you just need a fresh approach or new set of eyes to help build out and identify the key metrics and drivers within your business that are most likely to identify change that will help drive your business forward.

Speak to the team about your goals and vision. We'll tell you how we can help you make them a reality.

Are you looking to work with a strategic accounting partner to help shape your business’s future? We’d love to hear from you