One of my favorite books is one by Mike Michalowicz. The title is Profit First. The concept is really pretty simple. Pay yourself first and then use what’s left over to run your business. As simple as you think this is, in practice it requires great discipline.
There is something that I think can be added to this book that will bring you even more value. And, that’s understanding what profit needs to be used for. I often find owners aren’t trying to make their business profitable enough because they aren’t aware of all of these four areas. Today we’re going to go over what the four areas of profit are and why they are the key to financial freedom from your business.
You know, one of my favorite books is one by Mike Michalowicz. The title is Profit First, and the concept is really pretty simple. You pay yourself first, then use what’s left over to run your business. And as simple as you think this is, in practice it requires a great deal of discipline.
You know, there is something that I think can be added to this book that will bring you even more value. And that’s understanding what profit needs to be used for. I often find business owners aren’t trying to make their business profitable enough because they aren’t aware of all these four areas.
So today we’re going to go over what the four areas of profit are, and why they are the keys to financial freedom from business. So, let’s jump in.
- So, Number One is a lifestyle. Now if you’re running the business, and you don’t have enough money to pay for a great lifestyle, then running the business gets to be old pretty fast. I want you to have a great life doing all the things that you want to do.
- Number Two on the list, is having an emergency fund. Now here’s the truth about your business. You’re going to have good years and you’re going to have bad years. And then every once in a while you’re going to have a really bad year. In fact that year’s going to be so bad, that you’re going to wish that you had some money put aside that you could put into the business. And frankly if you don’t have that, there’s a pretty good chance that in the first five years of your business you’re gonna stop being in business because you just plain run out of cash.
And the truth is, when you need cash, you may not be able to raise cash, because the banks won’t lend, and suppliers want to be paid on time. And this typically happens at the worst possible time.
And the number one reason that businesses fail, again, is they run out of cash. Now unfortunately this happened to me a couple of times in the first 10 years I ran my business. And it was a really really unhappy time, I didn’t sleep, I was constantly in stress, I was not nice to many people at all. And the truth is, because I didn’t have an emergency fund, there was no cash for me to fall back on.
- Number Three, is having a fully funded sales and marketing program. Now your business is either going to be growing or it’s going to be shrinking. It’s rarely going to be staying the same. And I want you to have a business that’s growing.
And what a fully funded sales and marketing program means, is having funds not only to grow your business, but fund the growth in your business. And that means all the areas of business, that means having a fully funded marketing program, and having enough money so you can hire the right sales staff doing the right things.
Y’know, the truth is, banks aren’t going to loan you 100% of the money you need. So you’re gonna have to have excess cash available to fund that growth, because growth costs money. When you grow, your receivables get bigger, your inventory gets bigger, and your payables will get bigger also, although as a source of cash. You know, the truth is, you don’t want to be growing and growing and growing and run out of money.
Now my first three years in business, I was really fortunate. I was growing like crazy, and I was growing, frankly, at about 20, 25% a year, but in the vending and food business that meant I was spending two and a half million dollars and a million dollars in new equipment. That was great for the first year or two, everyone was loaning money, there was plenty of money to loan me, and then it ran out. And then I ran out of money, and that’s when I wished I had an emergency fund. So if you’re going to grow your business, it’s not just marketing, it’s not just sales, it’s also having the money available to fund the growth in your business.
- And the fourth thing is, and this is really a big one, it’s a fully funded retirement plan. We have a program we call Cracking the Cash Flow Code, and in there we have the four boxes of financial independence, which help you figure out whether you’re on the road to cash flow freedom or not.
And the truth is, your business isn’t going to get to retirement all by yourself. Now here’s something, let’s say your business sells for a million dollars. Now after taxes and fees, you’re going to be left with about $600,000.
Now we in the financial planning world like to say, well, you can spend 4% of your principal and be pretty safe under most circumstances of getting your retirement. But the problem is, if your business is worth a million dollars, and you have $600,000 left after taxes and fees, that means you’re only going to get $24,000 a year. Now I don’t know about you, but I don’t know many people who can live on $24,000 a year.
Now your goal here is to have a few million dollars in your retirement plan, so that will supplement the sale of your business or the liquidation of your business when you get there.
So, there you have it. If you want to achieve financial freedom from your business, you need to pay attention to all these four areas of profit.
So why don’t you scroll down, let me know what you think about having enough profit in your life. And while you’re at it, I’ve put together a quiz that will allow you to find out if you’re on the road to financial independence. It’s called the Four Boxes of Financial Independence, which I talked about earlier. It’ll take you about 10 minutes to do it, I bet you’ll find the results interesting. Just click on the button below this video and you’ll be able to take this quiz.
Hey, thanks a lot for spending a few minutes with me today. This is Josh Patrick, you’re at The Sustainable Business. I hope to see you back here really soon.