This article has been kindly written by the wonderful Michelle Manuel at Her Wealth IQ just for Bramley Business Solutions. Finance is pivotal to all our businesses so I hope you like this guest blog from a finance expert.
Statistics vary but it is estimated that as many as 60% of new businesses fail in their first 5 years. Many valid reasons are given from failure to plan, not testing product viability or the target market to entrepreneurial fatigue.
At the core of all of these reasons is money, or rather lack of it.
Don’t get me wrong, I am not saying you need truckloads of money to build a successful business, Spanx was started with the sum total of $5,000 and a lot of entrepreneurial grit. However, what will ultimately separate the viable businesses from those under the RIP headstone is starting with the end in mind: the profit.
I wish I could take credit for what seems an obvious solution, but the Profit First mentality is the brainchild of Mike Michalowicz, the author of the book of the same name who used his experience of turning his “cash eating monster” into a profitable business.
In the book he touches on the reality a significant number of entrepreneurs face, they start a business to gain financial freedom and then end up a slave to the business, putting all their life savings into it, racking up debt and facing the end of the month with no money. Michalowicz’s book promises light at the end of the entrepreneurial tunnel and transformation in our profits by implementing healthy “dietary habits” into our businesses, preferably from day one, but equally successfully at any point in the business.
Yes, you read that correctly; his system IS built on the 4 core principles of a healthy diet!
1: Use small plates. Constrain the amount available for the “calorie rich” expenses
In building our business we are seduced by the vanity measure of revenue and go full out racking up expenses to build that number. The expense line is not constrained and the result is that profits and our salary become the balancing figures. More often than not they balance out a zero.
Just as you would for a diet, he proposes limiting our calories, the business expenses. This means making the expense line the balancing number.
The theory behind this stems from Parkinson’s Law, which states humans will always spend all that is available to us. This is where we get into trouble when there is no limit, resulting in increasing debt levels and unsustainable outflows.
Principal 2 creates the limit we need to implement to get a grip on the expenses.
2: Consume the low calorie food first, leave the high calorie expenses until last
This basically means limiting the expense allocation. The book employs a clever approach that equally applies to our personal finances. Labelling each pound of income.
The way to do this is to establish separate bank accounts. The first portion of the income, the amount you are targeting as the profit, is immediately transferred to one of these bank accounts. The second portion, a reasonable salary, is transferred to a second bank account and the third portion, the allocation for taxation is transferred to the third bank account. The proportion that remains in the current account is the amount for expenses.
The book goes into extensive details on how to determine the target allocation percentages, which are referred to as TAP. They are beyond the scope of this article but I would highly recommend getting the book and implementing them. The book has some really innovative ideas as to how to get these allocations to work for you as well as how to use them to achieve increasing efficiencies.
The TAP allocations guarantee that the expense line will never become an insatiable monster!
3: Remove temptation, the downfall of any diet, by transferring the profit to a totally separate bank
Make it difficult to access your profit account. Remove it from your line of sight and forget about it. Focus on building the business and being innovative around your now limited expense line.
The same applies to your taxes. These are non-negotiable transfers and once automated will be left to accumulate with limited risk of you having to withdraw because of a perceived expense priority.
4: Make it a habit to be healthy by automating every transfer
Create habits around the allocation of your income and then focus on reigning in the expenses.
It can be very tempting, especially in the early days, to throw money at every shiny thing that guarantees business success. The reality though is that business success is guaranteed by creativity, commitment and innovation. By constraining the elements of our business that could easily get out of hand and detract from our success, we can apply our innovation and creativity to build the business in a more sustainable and healthy manner.
Fundamentally Profit First is the creation of powerful habits that can be applied in our business and personal finances. These habits work towards the goal of why we started in our business in the first place. Financial freedom, flexibility and the resources to create and contribute to the world on our terms.
Looking for more actionable ideas on building your business success? Grab the finance freebie from Her Wealth IQ.
Take a look at other recent Bramley Business Solutions articles:
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