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Let’s talk about the size of your business. How much does size really matter? To get straight to the point, I’m here to tell you that size is not nearly as important as the health of your business. What if we replaced the word “Big” with “Healthy”? How healthy is your company? Replacing that one word in the sentence changes everything.
In Mike Michalowicz’s book Profit First: A Simple System to Transform Any Business from a Cash-Eating Monster to a Money-Making Machine, he talks about this infatuation entrepreneurs have with the size of their business. It never fails, when two salon owners get together, one of them will ask the “How big is it?” question. It’s always some version of the same—“ How big is your business?” It might sound like, “How many employees do you have?” Or, “How many locations do you have?” Or, if you’re one of those straight-to-the-point types, you might even be so bold as to ask, “How much did you take in last year?” However it’s phrased, I hear some version of the “How big is it?” question wherever I go— it’s like a law of the entrepreneurial community!*
To be quite honest, this “How big is it?” phenomenon extends far beyond business. No doubt, it’s definitely part of our American culture, this emphasis on size. Bigger is better! Grow! Grow! Grow! As an entrepreneur, I know this to be true. Just go to a conference and pay attention to the number of times you’re asked some version of the “How big is it?” question.
I worry when I see salon owners who I care about focusing ONLY on the top line. I know why they do it. 1) It’s safe to say ego has a lot to do with it, but 2) They see growing the top line as the only way to solve the problem of keeping an unhealthy business alive. There is virtually no talk about profit. “If I can just get to $1 million in sales, I’ll be good.” or “If I just get 100 more new clients a month, I’ll be where I need to be financially.” These are entrepreneurs who are working themselves to the bone just to survive, with one eye on the emergency exit sign.
So, you’re running a ten million dollar company. Who cares? You’re living in a one bedroom condo that you rent, man! You have nothing in your bank accounts. The bank owns the Mercedes sitting in your driveway. Your rich aunt paid for your vacation. Meanwhile, you can barely cover payroll, and in most cases, you can’t. So what do you do? You tap the good ‘ol bank credit line. It’s all a facade and in my coaching experience, I’ve seen this exact scenario over and over again. Most salons are one business emergency away from financial ruin. If this describes your business, your business is likely to be dying a slow death. It makes no sense. You have team members relying on you. When are you going to wake up and take responsibility for the beautiful monster you have created?
All day long I will always admire the $500,000 business who is socking away $80,000 a year in profit over the $25,000,000 business that’s drowning in debt, hemorrhaging cash and one catastrophe away from bankruptcy. House of cards people, house of cards….
It’s time to break the cycle and start talking about the health of your company. Imagine telling someone that your business is debt free or we have $100,000 in cash reserves for a rainy day. What if we talked about equity? Picture yourself saying, “Our little business has over $600,000 in retained earnings as of yesterday.” I don’t know about you, but the sound of that gets me excited!
In his book, Mike talks about the GAAP (generally accepted accounting principles) accounting rule that defines profit.
Sales – Expenses = Profit
For over a hundred years, this is how we have defined profit. What’s left over after expenses are paid is profit. The problem with this formula is that it doesn’t take human behavior into account. It’s human nature to use up whatever’s left and then justify our reason for doing it! It’s kind of like giving yourself a month to complete a project. You will figure out a way to fill up a month with work so that you finish in a month when you could have easily finished the project in two weeks. So, what if we do something radical? What if we change the formula as Mike teaches in his book?
Sales – Profit = Expenses
Now there’s a concept! Take your profit first, and then live on what’s left! It’s like we’re tricking ourselves into profitability. Figure out your profit, tax and owner’s pay percentages as a percentage of sales, and twice a month take that amount off the top and transfer it into a savings account. And don’t just transfer it to any savings account. Transfer it to a savings account in a different bank. Make it hard to get to. Don’t order checks or a debit card for the savings account. Get into the habit of transferring money every two weeks. In a short amount of time, you will have a nice little nest egg saved up.
As Mike talks about in his book, most entrepreneurs who start following the Profit First system will come up short on the expense side of things. This is what he calls the inefficiencies of your business. This is why growing sales is normally the answer for most entrepreneurs when getting your expenses under control is really the answer. Folks, the easiest way to grow sales is to cut costs! I know it’s easier said than done. It ain’t easy! Come on, let’s be honest, if it any of this was easy, everyone would be doing it. It can be painful in the short term, but to run a healthy company, you will ultimately have to make some tough decisions along the way. Do you really need that office space or “training facility” where the rent is cutting into your profitability? Maybe you are overstaffed and your payroll expense has ballooned? Maybe you have too many monthly subscriptions to things that aren’t serving your business? If you’re like me, you can justify your way out of having to cut back on anything. We’re entrepreneurs! It’s in our blood. Mike talks, in detail, about ways to cut costs as well as a detailed system that outlines target allocation percentages for profit, tax and owner’s pay.
My advice would be to read his book first in order to fully understand his Profit First System. There he lays out a detailed step by step guide to guaranteeing profit for your company beginning today and every day going forward.
The Profit First system works if you have the discipline and desire to get your business healthy. My own personal experience using the Profit First system has provided dramatic results. In less than six months, we have managed to accumulate $30,000 (in addition to regular savings) in an emergency cash reserve as protection for our teams and the business. To think that in a year, we will have accumulated $60,000 blows my mind. Seriously, if we can do this, so can you.
Salon owners, it’s time we get our crap together! Profit first and THEN grow, Grow, GROW!
To learn more about Mike Michalowicz, powerful resources, and books he’s written visit his website.
*Michalowicz, Mike Profit First: A Simple System To Transform Any Business From A Cash-Eating Monster To A Money-Making Machine Obsidian Press.
April 26th, 2016 at 3:19 am
Great stuff Chris! Thank you for sharing about this book. We are working with Daryl at Strategies and we are about to raise our prices so we will finally have a 10% net profit (never have had it before). We are 94% productive and booked out for 2 months…we’ve been charging too little for too long. Still this idea of taking out your profit and paying your expenses with the rest is a great idea. My biggest fear was we’ll have profit for the first time and will somehow find ways to spend it all. This system directly deals with that issue. Thank you for recommending the book. I’ll be getting it for sure.
April 26th, 2016 at 8:52 am
Hey that’s a good problem to have Paul! Bravo! If you’re like me, the more cash you begin to accumulate in your savings account, the less you want to touch it. It sorta becomes a game of “How big of a balance can I create?” Good luck with it. Glad to hear you’re coaching with Daryl. He was my coach and taught me so much.
April 24th, 2017 at 8:03 pm
Exactly what I needed to hear. Im getting that book tomorrow, I cant wait to read it! Thank You!
April 24th, 2017 at 9:00 pm
Awesome! Glad you found it useful! I think you’re going to enjoy the read. The book is packed full of good stuff. 😉 Enjoy!