The battle cry of many small businesses – especially when you’re in the building stage – is to invest big bucks now so you can keep growing.
No matter what kind of business you own, there’s always going to be a portion of your revenue that goes to expenses – from your assistant to your website hosting. It’s the cost of doing business.
But how much is too much? How much should you really reinvest? And what happens when you continually sacrifice profitability?
Let’s break those questions down and dive into the idea of putting your profitability first.
But What is Profitability Anyways?
As a business owner, we tend to focus on two key numbers – our revenue and our expenses. And as we go about our business and hustle our hearts out, we lose sight of the most significant numbers in our business – profitability.
Your profit is the money left over after you account for all of your expenses, including your salary. (And yes, you should be paying yourself – more on that later.) There’s lots of schools of thought on small businesses and profitability, but my hands down favorite is shared by Mike Michalowicz in his book Profit First.
His approach has you flip around the equation of revenue – expenses = profit to focus on a model, where, as the name says, profit goes first. In his model, revenue – profit = expenses. Smart, right? That ensures that you’re actually making a profit instead of spending it.
How Much is Too Much to Spend or Reinvest in Your Business?
Every business is going to have a different answer based on your revenue, pricing model, business structure and much more. The amount a freelance writer has to invest in their business greatly varies from someone manufacturing a physical product.
Start by looking at your overall financial health and getting a grip on your revenue, expenses and profit. It’s easy to spend your money on a new course or coach as soon as the money comes in because you’re investing in your future. If you’ve made it, surely it’s okay to put it back into the business?
Not so fast. Getting a handle on your revenue, expenses and most of all your profit should be what guides how much you spend. Keep a firm eye on your profit and let that be the number that determines if you invest or not.
If you can invest and still have a healthy profit margin, and it’s something you actually truly need to help you grow, then give it the green light.
One thing I always tell my clients is to run the numbers for bigger investments and then sleep on it. A lot of times the thing you were convinced you needed doesn’t seem so important in the cold light of day.
How Much Should You Really Invest?
That’s entirely on you. Start by figuring out how much profit you want to make.
If you’re bringing in $50k/year and you want to make a $30k profit, you’re going to have a pool of $20k left for your expenses. If you have a $1k baseline of expenses, you’ve got $8k left to play with.
Traditional businesses may have expenses that are as high as 50% of revenue, while if you’re a freelancer, you may run at a lower 10%.
Month by month see what your expenses are and what percentage of your actual revenue it makes up so you have a number to track towards. And be sure to plan for times of year where your expenses may go up because of launch or other business events. Planning ahead for that will help you keep on track with your overall financial plan.
What Happens When You’re Not Focused on Profitability?
Hold onto your hats, because this is where a lot of things go completely bananas.
When you’re ignoring your profit you’re likely setting yourself up for a couple things to happen.
First of all, you’ve got a one-way ticket to Resentmentville (Population: too many entrepreneurs to count). If you’re working crazy hours and putting your heart and soul into a business, there’s only so long you can go without wanting to see some type of financial reward. And if you’re always the last one that gets paid and there’s never anything left after you do pay yourself, you’re going to eventually start asking “what the heck am I doing this for.”
Wanting to make money is normal and healthy. It doesn’t make you greedy or devoid of a soul, it just means you want to be compensated for your skills, experience and the time you invest week in and week out
Actually making a profit will make you so much happier in your business, happier than any investment in your business ever will. Because profit is what you can use to give yourself a nice year end bonus, or to give yourself a lump sum payment each quarter that you use to pay down your mortgage or save for a fun-filled family vacation.
Are you ready to put your profit first and stop putting yourself in last place? Make a money date with yourself this week so you can run your numbers and get your profit target in place.
