Most people seem to believe that if you have a savings account with a lot of money in it, then you are wealthy. As long as you keep it there,...
Small business owners face a number of challenges that can keep them from building their business from a shoestring operation to a booming, thriving company.
If you are not making a profit from your business, you are essentially running a charity.
Making a profit depends on the mindset: a profit first mindset should be the highest priority if you want to succeed, and here’s why.
1. Your Business Costs Money To Run And You Probably Aren’t Making Enough To Do It
From website hosting to office equipment and supplies to software, even home-based businesses cost something to operate. If you aren’t generating a profit, you are paying for those things out of your own pocket. And if you aren’t generating a profit, you won’t have the pocket money for long to pay for those expenses.
One of the best ways to figure out what kind of income you would need to generate to make a profit is to add up all of your business expenses – including your own salary.
That dollar amount is your “break even” line.
Until you are generating income above it, you aren’t making a profit. What happens when you add up all of your business expenses and look at your income? You are probably barely breaking even. If so, you need to change your approach and refocus on profit.
2. You Most Likely Have Expenses You Think You Need, But Don’t
A profit first mindset turns the traditional business formula of Sales – Expenses = Profit into Sales – Profit = Expenses. Rather than paying all of your expenses and then seeing whatever remains as profit, you first take out your profit and then pay your expenses out of what is left.
This “reverse engineering” forces you to be much more discerning about your expenses.
When you start to understand that every one of your expenses is cutting into your profit, you naturally start to cut expenses. This is particularly important for home-based businesses that may have a number of hidden expenses that simply get rolled into household expenses.
What you also have to remember, however, is that you actually need profits to pay those household expenses out of your own income. A profit first mindset helps you generate enough income to cover all of your legitimate business expenses out of your business income and your household expenses out of your profits.
3. A Profit First Mindset Keeps You From Being Sold Things You Really Don’t Need
Business owners are actually consumers just like anyone else, which means the pressure on business owners to buy products and services is just as fierce. They need to make the same tough choices in their business purchases as consumers do with their personal finances.
People that manage to accumulate wealth do so by learning to spend less than they earn. In fact, they generally continue to do so long after they no longer have to.
Some of the same financial principles that help individuals achieve wealth can also help business owners begin to turn a profit.
One company that began to apply a profit first mindset went from -$70K in Net Income to a positive $90K in Net Income in just 6 months, in addition to reducing their debt by 25%.
4. A Profit First Mindset Helps You Make Better Value Choices
When you start to think of expenses as something that eats into your profits, it changes the way you think about expenses.
Rather than thinking of certain expenses as being something you need to run your business, you begin to question how does this profit me? In other words, you have to ask yourself what kind of income is this expense generating? If an expense is not generating more profit than it is costing you, then it is not a legitimate expense.
For instance, let’s say you lease a luxury car for business purposes. If you are a real estate agent that sells high-end homes, the luxury car may be a legitimate business expense. Millionaire homeowners may in fact not trust an agent as much that drives an old or mid-range car. On the other hand, if the luxury car simply makes you feel successful, it might actually be an obstacle to you being successful.
5. A Profit First Mindset Helps You Prioritize Everything
This mindset doesn’t just apply to financials, it also applies to how you prioritize your tasks.
Every business has two types of tasks:
- those that generate income
- those that use the income to maintain your business
In reality, no one is ever going to be more motivated – or more qualified – to generate income for your business than you. After all, you are most likely the major stakeholder in your business, which also means no one benefits from profits more than you.
To focus on tasks that actually generate income instead of those that help you keep status quo, hire others to take care of maintenance tasks. When you apply a profit first mentality to your business, everything you do becomes geared towards generating and maximizing profits while simultaneously slashing unnecessary expenses.
A profit first mindset is critical to growing any business. Without a profit first mindset, you will constantly be just “breaking even.”
The goal of any business is not simply to break even but to thrive.
Marina co-owns a digital agency and enjoys discovering new formulas for spreadsheets. Whenever she finds the time, she is writing about life, self-improvement or her experiences. She firmly believes in hard work and talks about business on her blog Pinpuff. She has a turtle named Petra.