To survive and ultimately succeed in business, you must be earning a profit. Unfortunately, many leaders and owners struggle to protect their profits, significantly impacting their organization’s future. But, by making profit your first line of expense, you’ll be able to thrive for years to come sustainably.
A profit is a business’s financial gain. It’s typically the difference between what you earn and spend throughout the buying, operating, or production process. In other words, it’s the financial benefit realized when the revenue is greater than your expenses, costs, and taxes.
The Role of Accounting and Profit
Accounting is how you record financial transactions regarding your business. It plays a significant role in helping to measure profits. Whether or not your organization is producing a consistent profit can be determined by examining your accounts.
Why Do Businesses Fail to Protect Their Profits?
Small businesses often struggle to remain open and prosperous. One contributing factor to this challenge is they fail to protect their profits, losing momentum and financial gain over time.
Businesses lose profit when:
- They don’t track profits
- They don’t think strategically about their profits
- They have too many expenses
Strategic financial plans and tracking systems are vital to protecting your profits. Without them, you’ll likely miss important transactions, lose control of spending, and not sustainably or efficiently operate.
How to Protect Your Profits
The first step to attaining control of your profits is to work with an experienced accountant and bank. They’ll help you measure your finances and streamline your records, empowering you to make informed decisions.
You’ll also need to determine how you’ll approach your profits. Let’s look at two different ways to measure profits: the traditional accounting way and the Profit First method.
Measuring Profit the Traditional Way
Gross profit is the measurement of profit after removing the costs you incur from making and selling your products or services. The equation is as follows:
Gross Profit = Sales − Expenses
With this standard approach, business owners keep whatever is remaining as profit.
Measuring with “Profit First”
The Profit First method is different from the traditional accounting approach mentioned above. Profit First takes the gross profit equation and changes the order of its components. This small change can lead to a significant impact. The Profit First equation is:
Sales – Profit = Expenses
Contrary to the traditional approach, you take a percentage from each sale and reserve it as your profit first. Then, whatever amount remains covers your expenses.
Mike Michalowitz designed the Profit First method with small businesses in mind. His approach is rooted in Parkinson’s Law, allowing entrepreneurs and leaders to change their perceptions of profit, accounting, and budgets.
Parkinson’s Law and Profit First
Parkinson’s Law says, “Work expands to fill the time available for its completion.” What does this mean exactly? If you have 60 minutes to finish a task, then it’ll be done in 60 minutes. But how does this apply to Profit First?
Your business costs will expand and fill the budget available. If you deduct profit first, you can reduce expenses and increase your margins by ensuring those expenses don’t exceed the amount left after you deduct profit.
Profit is vital to the survival of your business, and at Belfield Management, we can help increase your margins! Our team has over 170 years of cumulative experience, along with over 7,500 business stories. We stand behind our pledge to support you and your organization for long-term success. For more information about how we can help you protect your profits, click here!