We all have “aha” moments in our life. Times when we hear or read something that suddenly moves us deeply, even shakes our foundation. They wake us up from the fog that is day to day life. I’ve had a few in my life. Some spiritual (Luis Palau), some political (Milton Friedman), a few in business.
The one that affected me most came from a speaker who discouraged financial advisors from thinking about their profit. He felt that profit was simply the byproduct of growth. “Just focus on growth and everything will take of itself.”
For me it was an “aha” moment because not only did I think that the advice was total BS, it also made me aware of what we as advisors are up against.
Our business is full of “vendors.” We have insurance companies and mutual funds who want us to sell their products. We have FMO’s and IMOS who receive over-rides. We have TAMPS and RIAs who earn basis points on our clients. Then there’s the marketing gurus, the service providers, and yes…even information marketers like me.
I realized then that my desire to run a business profitably ran counter to the “best interest” of these vendors. Oh sure, I could “grow my way” to profit, but such a strategy is flawed in so many ways (keep reading).
These vendors want us to do just two things: keep selling and keep spending. Sell our products, and while we’re at it, buy our latest marketing program. I don’t fault these vendors at all. Selling stuff is what they do. But as business owners ourselves, we must understand where their motives lie and how they can run counter to ours. We must also understand that when a service provider expands into new areas (the FMO decides to sell you a marketing system), it may be beyond their level of expertise.
Similar (and better) services may be acquired elsewhere for less.
The Need for Profit
I assume that like me you’re are a filthy capitalist pig who believes you have an American and God given right to make as much money as you possibly can so long as you do it legally and ethically. If not, click off this blog and promise never to return.
I truly mean that. The Bernie Sanders of the world are nothing more than parasites who are either incredibly naïve or incredibly cruel. They either lack an understanding of how the world works or they know exactly how it works and know that a world without profit is one that will lead to mass poverty and the loss of human rights.
You must believe in your heart that not only is earning a profit the most important thing you can do as a business owner, but also the most ethical thing you can do as a human being. Your pursuit of profit feeds your family and educates your children. It does likewise for your staff. It makes you available for your clients, protecting their financial futures. It funds charities….and yes, the government.
Your pursuit of profit truly makes you Atlas who holds the world on his shoulders. And while we are all tempted at times to shrug it off, we don’t. We plod along because that’s who we are. If you truly believe that you are worthy of success, then success will find you.
But the opposite is also true. Failure to believe it will greatly limit you. God doesn’t care if you’re financially successful, although I do believe he wouldn’t mind it so that we can help those who are unable to provide for themselves. I’m willing to guess far more poor people have entered His kingdom than wealthy, but the reality is that money and success is amoral.
It’s what you do with it that matters. The Steps for Profit Like most things that matter, profit requires planning. Edmund Hillary didn’t get to the top of Mt. Everest just wandering through Tibet. Same can be said of Michael Jordan’s six NBA titles. These men planned their success years in advance. They develop meticulous schemes designed to get them there. They studied the obstacles and opportunities. And they made necessary sacrifices to achieve their goal.
The traditional model for attaining profit follows the GAAP standard: Revenue – Expense = Profit. The problem with this formula is that profit is the outcome, not the control factor. We control our revenue and expenses and that leads to profit. It is certainly true from a common sense perspective, but not from a “human sense.”
Here’s an example: Think back to your younger days. Yes…way back. Okay, you’re not as old as me, so let me do it for you. When I graduated from college, my first job paid me $18,500. It was 1985. Depressing…I know. But that was the going rate that year. A few of my friends did better, but most of us were in that range.
I used to fantasize about what life would be like if I made $30,000. I would have more than enough and I’d be saving a ton. Well, three years later I was making that amount. Did I start saving a ton? Of course not. I adjusted my standard of living to make just as cash strapped as I was when I made $18,500. My rent was higher, I now had a car payment, I ate out more, and I fantasized about what it would be like if I made $50,000 a year. And when I reached that mark 2 years later, it started all over again.
We do the same things with our business. We think more revenue is the answer to our problems, but we fail to understand the role expenses play. Look, I’m as guilty as you are. I’ve invested in all kinds of “get rich quick” program.
Why? Because I had the money in my bank account and it was screaming to be spent. A big fan of Mike Michalowicz (Toilet Paper Entrepreneur, The Pumpkin Plan, Profit First), I decided to rework my operation to follow an entirely different formula when it comes to profit. It now reads: Revenue – Profit = Expense
What’s the difference you ask? Common sense says there is no difference. Human sense shows otherwise.
Here’s how it works: Begin by measuring how much of your total revenue last year went toward your salary (please tell me you take one), additional profit, taxes, and operating expenses.
Convert these amounts into percentages of revenue. Establish five bank accounts. Yes…five bank accounts: Income, Owner Salary, Operating Expense, Profit, & Taxes. And to make matters worse, I want the last two accounts in a different bank. I use an internet bank. They actually pay interest. Deposit all income into the income account.
On the 5th & 25th of each month, transfer money out of your income account and into the four other accounts based on the percentages you established in Step 2. By taking this approach, you’ve obviously removed from your business that which is yours and not yours (taxes). In reality, not much has changed. But psychologically, you’re in a different world. F
For more information on this concept, email me and I’ll send you a copy of Mike’s book: dan@AdvisorArchtiect.com.