3 Reasons Your Business is Not Profitable – Part 2
In Part 2 of his blog series, guest writer Bruce Baker continues to break down the 3 reasons your business is not profitable, and what to do about it.
REASON #2: Not Understanding the Flow of Money
It’s reportedly unhealthy for people not to breathe in and out regularly, so why expect this from your business?
As was mentioned in Reason #1 of the 3 Reasons Your Business is Not Profitable, understanding how your behaviour impacts the outcome (money) is an important place to start. Not understanding how to control the flow of money in and out of the business will remove all the value you gained by working through Reason #1.
Just like the human body breaths oxygen in and carbon dioxide out, so does a business system breath cash in and cash out. The only difference is that humans do this automatically without thinking…most of the time!
On the other hand, a business only has the owner to regulate the amount of cash-in and cash-out of the company. The business owner’s problem is not understanding this rhythm and making decisions that do not lead to profitability.
Imagine taking a deep breath and enjoying the feeling as you feed your body its much-needed oxygen. Breathing out as much as you can and stopping there…without breathing in for 30-seconds. Not the best feeling in the world! The discomfort we feel is our central nervous system ringing the alarm, forcing us to breathe in again.
If this makes an individual uncomfortable, why would this be expected from a business effectively maintaining the same balance? Sounds logical, but why not simple?
Work through the following exercise to start eliminating Reason #2
#1: On the first day of the week, determine approximately how much money needs to leave the business (i.e., expenses).
#2: In response to money leaving the business, determine your “battle plan” on how you will meet his obligation (i.e., at least break-even). If you cannot, do not sweat it…you have more weeks to work with until the end of the month.
#3: On the last day of the same week, review your accuracy of what money you anticipated leaving the business and evaluate whether your “battle plan” in at least breaking even was effective. Remember, make notes, so each week becomes a more effective week than before.
*Remember… If you do not at least break even for the specific week, no worries! You have more than one week in a month! Leverage this to plan for the week after. For example, if $1,000 more left the business than anticipated, ask yourself how you plan to make up for this the week after.
The more you practice this, the more golden nuggets you will discover about this process and your decisions’ effectiveness.
The purpose of this exercise is to provide you with an intimate understanding of how the money system in your business flows. The fact that the business owner regulates the flow of money in and out of the industry means that a company by default is not a cold non-living entity.
This means that the profitability of the business is directly associated with the owner’s natural behaviours. Attempting to go against your natural way of behaving, ignoring why you behave the way you do, leads to a path of misery and an unprofitable business.
Embrace and leverage your natural human behaviours and do not allow Reason #3 to hold you back from building your profitable business –
REASON #3: Changing Versus Leveraging Natural Habits
To ensure business profitability is to abandon the traditional axiom of Sales – Expenses = Profit and adopt Sales – Profit = Expenses
The GAAP (Generally Accepted Accounting Principles) formula for determining a business’s Profit is Sales – Expenses = Profit. It is simple, logical, and straightforward but not effective in building a profitable business because it does not account for human behaviour.
In the GAAP formula, Profit is a “leftover,” a “final consideration,” or something that is hopefully a pleasant surprise at the end of the year. Alas, the profit is rarely there, and the business continues its cheque-to-cheque survival.
Why is this the case? As noted above, natural human behaviour is not considered. One kind of human bias that most are not aware of is the Primacy Effect (i.e., people’s tendency to place more importance on what they see or encounter first as opposed to last).
It does no good to expect to build profitability and reduce debt if “expenses” are positioned first in the formula as opposed to “Profit” being “second best.” A human being does not work this way, and ignoring this, ends with the business not being profitable.
Placing profit first and flipping the formula to Sales – Profit = Expenses allows the business owner to leverage their natural behaviour and habits. Leveraging our everyday habits instead of changing what we do naturally opens a brand-new world to business profitability.
Another human bias that impacts our ability to be profitable is Parkinson’s Law. Author and historian C. Northcote Parkinson theorized that our demand for a resource increases to meet its supply.
For example, when we are given 2-weeks to do a project, it takes 2-weeks, and when we are given 8-weeks to do the same project, it takes 8-weeks. That is why when given
$1,000 to complete our work, we get it done with $1,000, and when given $10,000 to achieve the same outcome.
Making Parkinson’s Law an asset vs. a liability is immensely powerful in building profitability. By taking profit first, the money available for expenses lessens, and we are forced to find ways to get the same things done for less money.
Work through the following exercise to start eliminating Reason #3
Make a great leap forward by reading a few chapters from my friend and mentor, Mike Michalowicz’s book – Profit First.
I share the TFR system with business owners in my FREE group – Profitable Business Owners