I attended the Slash and Miles Kennedy concert at Casino Rama in early October. My son is a huge Slash fan and managed to not only get tickets to the concert but also backstage passes to meet the band. You must be wondering … what on earth does a Slash and Miles Kennedy concert have to do with a small business profit improvement program?
Let me explain.
We arrived at the concert venue an hour early so we could grab dinner prior to the concert. We settled on an all-you-can-eat buffet for a seemingly reasonable $18.95 a person.
Three quick observations:
- The restaurant was quite large (table to buffet line was a bit of a walk)
- The food was fine
- The plate sizes were really small
We each grabbed one of the plates, not much larger than a tea plate, and filled the tiny thing with food.
The restaurant isn’t stupid. They know they have a captive audience, given their location inside a casino. They also know that once you’ve been seated and waited a few minutes in line, you’re not going to leave the restaurant because of the small plates.
Sitting at the opposite end of the small plate problem is one of my favorite family restaurants, The Cheesecake Factory. For those who haven’t been there, their serving sizes (and plates) are massive.
When they serve a meal on a large plate, it only makes sense that the restaurant is going to fill the plate, edge to edge. After all, it wouldn’t make sense to serve a regular-sized portion on an extra-large plate.
What thought would come to your mind if the restaurant did that and left lots of space around the edges?
Not only wouldn’t it look right, but the perception would be that the restaurant was ripping you off.
If you grab an extra-large plate at the buffet, your natural inclination is to fill the plate.
And that, my friends, is what plagues most people—and businesses.
Most people approach their finances and run their businesses with a large-plate mentality.
If you see a large plate at a buffet, you need to fill it.
Seemingly, if you see a lot of money in your bank account, you’re left with the impression that you’ve got a lot of money to spend. So you spend it.
The First Steps to Your Profit Improvement Program & Profit Strategy
Most entrepreneurs I speak with call me looking for help with marketing or sales, or they believe they have a problem growing their company because they can’t figure out the marketing.
Although that might be true, one of my first gauges of how well their business is doing—and how ready they are for the next stage of their business growth—is how they answer what is usually my second question …
My first question: “How profitable was your company last year?”
Unfortunately, many entrepreneurs don’t know the answer to that question. But here’s the kicker.
For those that claim reasonable profitability, my next question is, “OK, so you say you made $X00,000 in business profits last year. Where are those profits?”
“What do you mean?” is the typical response.
“I mean, if you made $X00,000 in profits last year, where did you put those profits?”
Invariably, many entrepreneurs don’t know. And that’s a problem.
They see a big checking account, and they spend the dollars sitting inside the bank account like a restaurant patron takes food to fill their extra-large buffet plate. They have no profit strategy.
The plate looks large, so you keep taking. The account looks large, so you keep spending.
But what if the plate looked small (like at the casino)?
You would take much less food, wouldn’t you?
Well, what if you operated your business such that the profits that were sitting in your bank account were put aside, way before you had a chance to spend those dollars? What if you actually began a profit improvement program?
What if you made your bank account look smaller?
The 5 Step Profit Improvement Program
1. Look at the income statement your accountant filed and sent to the government for tax filings last year. What is the percentage of profit relative to your revenue? For example, if your company made $100,000 on $1 million of sales, then your magic number is 10%.
2. Open a separate savings account at your bank.
3. Take 10% of your sales every week or month, and move those dollars directly into the savings account.
4. If your magic number isn’t at least 10%, then it’s time to ask yourself why.
It’s possible you have a big-plate problem: you see a bank account with lots of dollars and believe it’s Christmas every day. If that’s the case, then proceed to step 5.
5. For those that don’t have a magic number of at least 10%, it’s time to follow steps 2 and 3 anyway. Yes, you’ll run out of money, but it will force you into your savings account, which will do two things:
- Highlight that you likely have a spending problem.
- Force you into seeing a smaller plate at the buffet line. Smaller plate equals less food.
You can’t spend money you don’t have, and that’s why you need to begin a profit improvement program now.
One of the problems with most businesses (and people) is that they have a spending problem. That’s why most financial planners advise that you should take 10% of your salary and put that directly into an investment account. There’s no reason that you can’t do the same thing with your business.
Watch your cash flow. Fix your cash flow. Understand your accounting and finances. Pay yourself a profit. Only then is it time to start the work on expanding your business.
The Average Small Business Needs a Profit Strategy
I wrote an article recently titled: How Much Profit Does the Average Small Business Owner Make a Year?
I’m sure some of these statistics won’t surprise you:
- over 85% of small businesses in the USA have only one employee
- the majority of these single-person small businesses are making less than $10,000 per year in profits
- the average profit margin for a small business is less than 10% a year, meaning, for every $100,000 in revenue, the small business makes less than $10,000 per year. The actual number is closer to 7%, and varies between 1 and 7% per year and varies depending on economic conditions.
- over 50% of small businesses don’t make it past year in business
Based on these statistics, many of these small businesses need to work toward improving profit margins, and the small plate theory and the 5 steps I outlined above in regards to a profit improvement program are an excellent start.
Hopefully, now, you can enjoy the meal!
If you enjoyed this post, you might also enjoy this one: Profit Isn’t a Disease. It’s the By-Product of a Well-Run Company. If You’re Not Yet Profitable, Fix It or Get a Job.
You should also consider subscribing to my blog. I publish one article a week on small business and wealth creation. You can subscribe here.
Also, I published a book during the summer of 2018, “The Kickass Entrepreneur’s Guide to Investing, Three Simple Steps to Create Massive Wealth with Your Business’s Profits.” It was number 1 on Amazon in both the business and non-fiction sections. You can get a free copy here.