I am a huge fan of numbers – it’s why I became a CFO! If you’ve read any of my past blog posts, you’ll know my number one metric in business is profit. Check out this post for insight into how to increase profits easily, and also grab my free Profit Plan tool!
So, I have a question. How often have you heard an entrepreneur say they have a 6+ figure business? I bet it’s a lot. But do they mean revenue or the money actually going into their pocket?
I’ve seen businesses make over $1m in revenue but still take home less than a business bringing in $400,000. It doesn’t matter how much your business is bringing in unless YOU benefit from it – and that’s why profit is so important!
If you want to increase the amount you’re taking home, you must understand the difference between sales and profit!
The key thing to remember is this: Sales are what your customers pay your business; Profit is what your business pays you!
Once you’ve got that distinction clear, you can start looking at ways to increase your profits – not necessarily your revenue.
How can you make sure your profit is as big as possible?
There are two main approaches we can take when looking to maximize our profits:
- Tracking our finances
- Evaluating our pricing
Bookkeeping to maximize profits
I’ve said it before and I’ll say it again – bookkeeping is essential to run a profitable business. It’s the only way you’re going to see what’s really happening inside your biz, and sadly, it can’t be avoided.
If you want to stand a chance of increasing your profits, you need to know exactly what money is passing through your accounts every day. Make sure you grab your copy of my free Profit Plan tool which will help MASSIVELY with this task!
Make sure you know exactly how much you’re bringing in from sales and how much you’re having to pay out on the running of your business each month. What’s leftover is your profit – and that’s the really fun part!
Why more sales won’t mean more profit
So many entrepreneurs think they can turn their business into a profitable one by simply chasing down more sales. That isn’t going to work.
Well, when you chase more sales, you have to significantly increase your workload to do it. That means more overheads, more expenses – and more burnout. You end up working so much more just to make the same profit. Where’s the fun in that?
Effective bookkeeping for your business
I know the idea of bookkeeping can be kind of terrifying at first. It’s a skill set that not all of us have mastered. But that doesn’t mean you never will…
You can choose to DIY your bookkeeping – it’s really not that difficult to grasp. I even have a full course that will teach you everything you need in order to effectively track and manage your finances.
If you don’t have the time, the energy or the desire to do it yourself, that’s ok! You can outsource to someone who can – but please, prioritize bookkeeping!
So often entrepreneurs see it as something that’s boring and stuffy, and only needed for tax returns. If you have that view of bookkeeping, then you’re missing something important: The chance to increase your profits every day.
There comes a point in running a business where we have to be strategic. You can’t keep throwing spaghetti at the wall and hoping it sticks. If you’re not strategizing, if you’re not tracking where your money is going, you’re running a business on luck. And luck eventually runs out.
Pricing Evaluations can Increase Profits
Talk of strategizing leads me onto the second effective way to maximise profits – Know Your Pricing!
Pricing isn’t a feeling. It’s a formula. An equation. A strategy that’s going to find that sweet spot when charging customers for products or services.
There are 3 main components that need considering when setting your prices:
- Cost of Goods
- Operational Costs
- Owner’s Compensation
Calculating the cost of your services
This aspect of pricing is pretty straightforward – it’s the total you’re spending on the materials you need for sales. Throwing back to when I owned a restaurant, my cost of goods was the cost of the food I was buying in.
This is the foundational component that you need to be aware of when it comes to setting your prices.
What are your operational costs?
These are just as important as the cost of goods, but can often be neglected. When running a business, you’re not just buying materials to sell. You’re maybe paying employees – and likely paying fees to a payroll company to process those wages. You’re spending money at Staples on office essentials to run your business effectively. You’re subscribed to a CRM system and email provider, paying for marketing, outsourcing admin tasks to a virtual assistant…
The cost of running your business is so much more than simply what you have to buy in, so this needs to be considered when calculating the prices that will maximize profits.
This final area is one that, sadly, gets forgotten about by most business owners. You’ve covered your costs and that’s great, but why did you start your business? I’m guessing it was to make money.
How can you do that if you’re not considering this when setting your prices?
You could be working all the hours God sends to maintain a successful business – but you’re not bringing home a paycheck. No. That needs to stop now!
When setting your pricing, you need to calculate exactly how much net pay you need to be taking home to cover your personal living expenses (i.e. after you’ve paid Uncle Sam) – and add on a little extra for the fun stuff.
Can you sustain your current prices?
This is the real hard-hitting question when it comes to running a business. If you’ve calculated, for example, that after costs and compensation, you need to complete 500 cleanings a month at your current Cleaning Business prices – can you do it?
Can you find the manpower? Are there enough hours? Enough custom?
If hitting your targets becomes unsustainable you have two options: tweak your outgoings or tweak your prices.
Knowledge is Power when it comes to running a profitable business – whether that’s knowledge of what your money is doing, or knowledge of your optimal price points.
Make sure you take the time regularly to track your data and evaluate your pricing. These are going to be the things that explode your business profits.
If you want to watch me discuss this training in real time, make sure to check out this YouTube video. And don’t forget to download your copy of my free Profit Plan tool to set you off on the path to profits!
Check out my website to learn more!