I think every consultant or business owner has experienced that tire-screeching moment when they open up that first lovely notice from the IRS and realize, “Holy (expletive, expletive), I didn’t think I’d owe them this much money.”
I remember mine not-at-all-fondly. I was sitting down with my accountant, Matt, who gently broke the news to me that I had a bill coming due to Uncle Sam with a fewwwww more digits than I was counting on.
My reaction? Something similar to this, I’m sure:
Matt, surely NO stranger to this expression, calmly replied, “Kait, the good news is if you owe this much, it means you are MAKING money, now we just need to figure out how to set you up so you don’t experience this kind of shock factor again.”
So, we did just that. We created a little account that I can’t see, and my bookkeeper moves 30% (gulp) of revenue away so I can’t touch it. And guess what? I’ve never had a problem paying my taxes since (5 years and counting, woo hoo!)
Why do I bring this up? Because two weeks ago, I was lucky enough to attend Entrepreneur Organization’s “Profit First” Event featuring five-time author Mike Michalowicz.
For those of you who aren’t fan girls and boys of Mike, his most recent book Profit First breaks down the idea that profit is not an event, it’s a habit.
What does this mean?
It means that you don’t someday, somewhere grow to the point where you achieve profitability. It means you start taking actions NOW that make your business profitable. Much like creating a personal nest egg, Mike encourages to save profit FIRST then divide up the rest.
Essentially, he flips the formula of
Sales – Expenses = Profit → SALES – Profit = Expenses
He advocates that when revenue (that meaning real revenue being after materials and subs) comes in, you divide it into the following categories in this order:
- Owner’s Pay
- Operating Expenses
The pre-determined percentages that you allocate to each category vary based on your business’ revenue range, but operating expenses COME LAST.
This way you can set your business up to be profitable from the start.
Going back to my tax example—I didn’t have funds in my account to pay the bill at the time because I had either spent them on the business or on my own lifestyle.
Now that my tax funds are skimmed right off the top and put into the tax account, I have never had a problem making a payment and I’ve adjusted my expenses and lifestyle accordingly.
Similarly, if you make operating expenses last, you’ll find you get very creative with these expenditures. Mike related it to a tube of toothpaste. When you have the fresh new tube and you drop some…whatever…there’s plenty more—squeeze another blob on. But when you’re down to that last, throw-your-body-into-it squeeze for the hopes of even a small dollup, you’ll get prettyyyy crafty and resourceful. (By the way, he said cut the bottom off the tube. WOW–You’re welcome for sharing that tidbit.)
While these concepts may not be all that new or novel to you, they are TRANSFORMATIVE, because like anything that makes an actual impact, it is based around a psychological shift.
It’s this profit-oriented psychological shift that I think a lot of solopreneurs are missing out on. You see, if you’re anything like me, you kind of “happened your way” into consulting. You received some 1099 opportunities and income because you know what you’re talking about, but you never actually sat down to develop a business plan on how to scale your consultancy. That’s a critical step in generating profit that rewards shareholders (YOU) and positions your business as valuable so you can actually perhaps sell it one day.
TAKE IMMEDIATE ACTION:
So, what did Mike say consultants can start doing NOW to make this shift? Start simple. He said just take 1% of your real revenue and put it into a Profit Account.
Don’t touch this account. Don’t pay yourself out of it (that’s “owner’s pay”), don’t reinvest it back into the business (that’s just an expense then) and don’t put it into the tax account. It is profit. Period.
When you build this profit-first habit, like any muscle, you’ll get stronger and your business will too.