Adopting A Profit-First Mentality
Back in the day, we recorded an entire series on starting your business and one of the first subjects we talked about was adopting a profit-first mentality. Here’s the thing, we re-looked at that episode and have so many more things to say! The way we run our business has dramatically shifted in the last 12 months and because of that, we have so many things to say to people who are just getting started. Even if you have an established business, we have some thoughts about what you should be doing differently when it comes to your dollar bills.
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We recorded that first episode about adopting a profit-first mentality in February of 2018 but we honestly didn’t really put our ideas into practice until 2020! It took two years for us to learn how to do that, so we are going to save you that time today. We are not saying that our first episode has no value, but now that we have actually been through the trenches, this is the episode you want!
Why Should You Want to Start Businesses in the First Place?
When any of us start a business, the first thing we think about is how much can we make from it. Of course, you will focus on what your product or service will be but at the end of the day, there is something in your head saying you need to make more when you decide to start a business. If you are a millennial, you grew up hearing that you need to love your job, but probably also graduated during a recession where dream jobs were few and far between. So a lot of millennials started businesses and this could have been a trauma response to this environment. When it came to running a successful business, Abagail used to think it was all about sales, and that the more revenue she made, the more profit she would make too. She has since realized that this is totally wrong because if your expenses are less, your margins are higher, so getting a business off the ground is about getting to know the proper ratio between the two.
How Much Your Business Needs to Make to Survive
When it comes to starting a business, our philosophy is all about working backward using a profit-first approach. The thing to pay the most attention to when you are getting started is how much you want to bring home each month. This monthly figure should be what affects the decisions you make, and not the other way around. Our formula is about getting a realistic idea of what you need to make to establish the kind of business you need to create. The first step is getting a clear idea of what you need versus what you want. These things sometimes correlate but other times they don’t. The important figure here is what you need, not what you want. Once you know what you need, be aware that what you personally need to make is not the same thing as what your business needs to make, because running a business comes with expenses. The model we suggest is that you pick a figure you need to make in a month, then multiply that by 12. This gives you the money you need to make per year. After you have this amount, double it, because this then accounts for the other expenses your business needs to run. You are aiming for an 80% margin here, where 50% is for earnings, and 30% is for taxes. The final 20% should then be used for reinvestment (expenses).
Working Out Your Capacity and Setting Your Pricing From There
A lot of people get afraid at this point with how much they realize they need to make per year for their business to survive. This is why it is helpful to break things down into that monthly amount. Once you have the monthly amount clear in your mind, the next step is to figure out what you are capable of doing each month to bring in that amount. The great thing about following this model is that it makes pricing your product or service really easy. If you know what you need to make each month, and you know what you are physically capable of doing, then you can work out exactly what you need to charge per product or service offered to help you reach your monthly goal. Another great thing you can implement here is working out how you can add little tidbits of value to your service to push the value it offers a customer or client up to the point where it matches the price point you are asking.
Why You Should Start Your Business Using A Service-Based Model
The tactics we are sharing are centered around starting a business. Chasing sexy revenue goals is not a long-term strategy and is not useful in the first phases of the development of your business. It’s important to think about chapter one, not chapter 20. It is easy to get caught up in what other businesses are doing, especially in the product-based world, but we are here to tell you that product-based businesses are in fact far harder to start. Abagail wanted to do products for so long but to make what she wants out of a model like this, her business would have to make hundreds of sales a month. The only reason Emylee runs a product-based business is that she already has a job that she is perfectly happy in and she also has the creative energy left over to do it. There are so many overheads in a product-based business but if you start out with a service-based model instead, you can easily land enough clients each month to make what you need. Doing things this way will give you the confidence boost you need as well, and you will be getting a full education on how to run a business at the same time. Then, once you have reached the profit goals you need, you can start thinking about how to branch out thereafter. Our intention by giving you this warning is not to kill your dreams, but rather to help you meet your needs. We have both struggled with money before so we know the struggle is real but with a service-based business that follows this model, you can be confident that things will work out for you.
The Next Steps To Take Once Your Business Meets Your Needs
This model is all about getting off the ground but once that has happened there are other things to start thinking about. One thing to bear in mind once your business is ticking over is that you need to watch your monthly numbers like a hawk. Your margins change over time and they depend on how you run your business and serve your clients. Another thing is that once you have gotten to the point where you are making enough to pay yourself, you must start thinking about what changes to make to take your business to the next level. Maybe you need to increase your expenses so you can scale, start working less, or reach a different goal. Sometimes the thing that stops you from growing is actually yourself, so you need to get to the point where you feel you deserve to be making more so you don’t get in the way of your business growing. You can’t stay in hustle mode forever, so at some point you do need to make some adjustments that allow you to delegate but still keep bringing in more money. You might even find that you enjoy the way your role in the business starts to change. At the end of the day, we are here to tell you that almost every service-based business owner can reach six figures in the first 12 months, which is more than the average entry-level job earns. So, as always, we want to tell you that we are here to help and if you have any questions be sure to send them our way! Good luck in all your business endeavors!
Quote This
When you know the proper ratio for expenses and profit margin in your business, you can have a successful business in one year.
Highlights
Why Should You Want to Start Businesses in the First Place? [0:03:35.1]
How Much Your Business Needs to Make to Survive [0:08:38.1]
Working Out Your Capacity and Setting Your Pricing From There [0:20:17.1]
Why You Should Start Your Business Using A Service-Based Model [0:26:29.1]
The Next Steps To Take Once Your Business Meets Your Needs [0:33:43.1]
ON TODAY’S SHOW
Abagail & Emylee
The Strategy Hour Podcast
We help overwhelmed and creative entrepreneurs break down their Oprah-sized dreams to create a functioning command center to tame the chaos of their business. Basically, we think you’re totally bomb diggity, we’re about to uplevel the shiz out of your business.
KEY TOPICS
Service-based businesses, Starting a business, The profit-first mentality
