Ellen McIlhenny - “The Smart and Savvy Exit – The Big Turnaround – Who’s Core Values?
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Due to technical difficulties last week, I will open the show once again profiling the book “Profit First
Last week a client sent me the link to a podcast that he follows. The guest on the podcast was a small business owner who was talking about how he used the principals of the book “Profit First”, by Mark Michalowicz to greatly increase the cash flow and eliminate debt all in the matter of a few months. He did all this in the middle of the 2020 pandemic!
Since I listened to it, I have become obsessed with this book. I had heard of it before but to hear someone describe their own experience and success urged me to take a closer look. I both bought the book and downloaded the free tools that Mr. Michalowicz offers on his website. Not only am I talking to other clients about this, but I plan to start using these techniques for my own business.
The first thing that needs to be done when using this method is to start thinking differently about your profit and loss statement. Instead of Sales Minus Expenses Equals Profit, it’s now Sales Minus Profit Equals Expenses. So, the idea is you decide what the profit needs to be, and the rest left over is what you can spend. This means some spending that had been planned may need to be delayed. Many business owners look at pouring every cent made back into the business as a prudent move, but that could be risky if a crisis emerges…kind of like a global pandemic. This way, by taking profit you have the resources to deal with the unplanned.
The idea is to set up bank accounts based upon the functions of your business:
These can be added to, based upon your business, but these are the main ones to focus on.
Next figure out where your revenue is being spent currently. What is your business buying day-to-day right now? This is a good exercise to go through regardless, because my guess is most owners don’t have a good idea where all their money is going.
Once you know this then you can try to figure out what percentage of your revenue you want to go to each spending category.
For instance, for each range of revenue, say $0-$100k, $100k-$250k, $250-$500k, you may target 5%, 10%, 20% net profit, respectively. Then you figure out what percentage operating expenses would be at each level, as well as owners’ pay and taxes. All the percentages together should come back to 100%.
Michalowicz has come up with a neat little chart that you can help you figure what those numbers would be.
As the money comes into the revenue account periodic transfers need to be made to each of the expense accounts in the proportion that was established based upon the forecasted range of revenue. It’s best to only pay expenses out of the designated bank account to maintain the integrity of the system.
The important thing about this process is to at least every quarter re-assess how your original plans and percentages are working. If adjustments need to be made, that’s ok, but the closer you can stick with the plan the faster your cash flow will start benefitting.
We here at IBGR are committed to helping small business owners with questions you may have about running your business. Whether you are just starting or have been around for many years. We are here for you.
IBGR has a lot of exciting things happening during season 6. Be sure to become a part of our community so you can be a part of it. Thanks for listening.
Show Objectives - The Why
Today we will continue our discussion of my book The Big Turnaround: How bad management nearly destroyed an exceptional company. Today we will be talking about chapter 9 “Whose core values? Burgess Industries attempts to define its company core values.
Then I’ll talk about another main take-away from the book – Define your company’s core values and ‘walk the walk’.
Our “Tuesday Tip” – Find a Mentor become a Mentor.
Next Week: “Community Outreach”.
Written by Ellen McIlhenny
Owner of CFO Plus Services, a Fractional CFO services firm which also offers Back Office Bookkeeping Services. Author of the business novel The Big Turnaround; How Bad Management Nearly Destroyed an Exceptional Company. Check it out at https://thebigturnaround.com
You can connect with Ellen on any of her #cfoplusservices platforms or firstname.lastname@example.org
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