Are You Making a Profit?
This month, we’re talking profits here on C&T.
Increasing profits is the goal of every business – large or small.
When you’re starting out, making a profit might seem like a far-off dream – but it’s something you need to plan for, work for, and aim for if your business is to become a success.
Let me tell you about my journey to profitability.
I remember my first year running Epheriell as a hobby business – I think I turned over something like $4,500 in the year… and spent about $5,000.
At that point, I was just happy to have recouped most of my expenses!
Many of you are probably at this stage – aiming to just cover your costs (and we’re talking things like materials, fees… you’re not even thinking about paying yourself yet).
Some of you might be a bit further along… actually making more than you’re spending on your expenses each year, and having a little bit left over to actually use towards either the rest of your life, or business-related, non-vital expenses (like attending a conference, or doing an e-course).
This is the point where things start getting pretty exciting. You’re realising that you are actually making money – real money that you can do stuff with!!
But you’re still not really paying yourself, am I right? Not on a regular basis, anyways.
Until you’re actually paying yourself for your work, you’re not really making a profit. Why? Because your ‘wage’ should be a core expense of your business.
Until recently, this was a bit of a murky area for me – I knew I was making a profit above and beyond my expenses (including my ‘wage’ – though I didn’t have a defined number for this) but I didn’t have a concrete number or system. This was because all of my money came into and went out of the one account – personal and business combined.
I recently made the decision to separate my business and personal expenses by opening a completely separate bank account with a different bank to my usual one for the business. Since I’m a Sole Trader (Aussie tax entity definition), there’s no legal need for me to do this, and my new accounts are just personal accounts, as I don’t need the features of a business bank account.
However, doing this has really helped to separate ‘business’ money from ‘personal’ money.
I have a direct debit set up from my business account to my personal account at my original bank. This transfers money automatically at a fixed rate twice a month. It’s like having a salary again!
I am literally paying myself.
All my business expenses come out of the business account, so I know any money in my personal account is free and clear – money that is mine to do with what I want separate from the business.
I’m able to do this because my business has reached a point where I can pretty much predict my cashflow each month, and know that the ‘salary’ I’ve set myself will never be more that what will be coming into my business account each month.
Now, as for the money sitting in my business account?
That’s where my profit comes from.
That money is sitting there, waiting to either be spent on the business, or moved to my long-term savings account (which has a good interest rate).
I’ve been in the game long enough now to estimate my expenses each month – heck, each year! So I know how much of that money is profit free and clear that I can play with. I check my balance sheet regularly to see exactly where my business stands (we use Xero accounting software).
I’m by nature a reasonably frugal person. That is – I’ll put money in savings before I think of doing anything else with it. Especially being self-employed, I’m extra-cautious to make sure I have a healthy buffer of money in my savings account. After all, I’m not going to get workers compensation if I injure myself and can’t work, and I sure don’t get sick pay or holiday pay!
I have long-term savings goals that I celebrate reaching. Yes, I am nerd enough to get a buzz out of reaching savings goals.
That said – I’m also in agreement with the old adage ‘you gotta spend money to make money’. I don’t spend a lot of money on the biz (for example, I don’t spend much on advertising at all) but I do spend some money on educating myself (the occasional conference, book, or course) and I like to try new things (like a bridal trade show last year to promote my wedding bands).
Without profit, you don’t have this money to re-invest in growing the business.
So – that’s my story. I hope there are a few useful nuggets there that you can take away and apply to your own business.
I’d love to know which stage you’re at – the ‘just covering expenses’ stage; the ‘making enough to spend a bit more on the business’ stage; or, the ‘I’m paying myself and making a profit’ stage. Do you even KNOW which stage you’re at… or have you been neglecting the analysis of your cashflow?
Image from © Lime Lane Photography