For most businesses, profitability is usually a hit and miss. In some cases, a wish or a hope that it may happen. Kind of like gambling on the lotto.
Instead of just hoping and gambling on your business to be profitable. As a business owner you need to disregard the old profitability formula that so many accountants have taught you.
Sales minus Expenses = Profit
The Old School Accountant
Here is the new formula is below:
This formula is so powerful. Because it allows you plan and set small positive goals forward through incremental and focused improvement.
If a business owner takes too much of the profit out of their business, then they are actively starving their business. Starving it of future growth and creating cash flow problems.
However, if they take too little profit out of the business, they’re depriving themselves and their family of the rewards. Rewards of all the blood, sweat and tears. Either way, it’s not a good situation to be in. Especially if the owner is stressed and the business is burning out!
So, to avoid these profitability problems, here’s what you do.
Your Business Treasure Chest is a business bank account that is used to deposit profit. Profit that you and your proactive accountant believe can be afforded each month. This is done via monthly budgets for it to be paid out to the business’ owners every three months.
You don’t simply guess and deposit random amounts of money from your trading bank account to your “Treasure chest” account. You need to find your magic number each month. And to know this, you need to undertake a Profit Affordability Assessment. This assessment ensures that you don’t deplete your business or yourself of cash.
In short, your Treasure Chest is your profit’s ‘safe place’ until it is needed. Rather than looking for it and soon realising that you can’t find it or worse, not knowing where it went!