Understanding How Profit Changes as Your Business Ages
Episode 724: Show Notes
Maybe you’re a one-woman show. Maybe you’ve hired a part-time employee or a contractor or two. You have probably seen significantly high profits in your first few years. Now, you’re entering years three, four, five, and beyond, and you want to pay yourself more, hire more, or have other expenses you want to reallocate funds to. You’re so married to your high profits, that you will create goals for yourself to do anything you can to maintain those profits while being able to spend more money. We really want you to give yourself a bit of a break here! And that’s exactly what we hope to empower you to do through this episode.
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What Profit Really is and How the Relationship Changes Over Time
Profit is your total income. It’s all the money that comes in the door. 99.9% of you should be in an accrual accounting system. It’s all the income you receive minus all of your expenses in the same set period. It can be typical for a service-based business owner to be seeing profits as high as 90%. We’re seeing those profit margins in a lot of business owners that we are working with. They’re coming to us and saying that they don’t know how to make more money because they already feel they’re at capacity, and they’re tired, and they can’t imagine turning the knob up to make more.
That’s when it might be time to do some work on your mindset! It’s so important to disconnect your self worth from your high profits because those things are not one and the same. The most powerful tool we can suggest here is to spend some time researching the profit margins that other businesses seek. A lot of business owners are actually operating on 15% or less profit margin because, as you already know, running a business is expensive!
One of the benefits of being in a service-based industry is that your primary cost is your labor. It still needs to shift over time, and so a lot of it comes down to the question of whether you’re charging enough. But the thing we want you to start to understand is that there is a juxtaposition between the business making more and you making more.
Why Your High Profit Margins Might Not Actually Mean Shit
If you feel confident and comfortable with your high profit margins, but you’re not paying yourself a reasonable salary, then your high profit margins might not mean shit. If you’re not paying yourself a high enough salary, there are other issues at play here, even if you don’t need the money. It’s not a sustainable business if you can’t earn a living from it! Even if you never want to pay yourself a salary, you’re going to have to do that with tax in mind as soon as you hire an employee. Why grow a business to this size with this level of complication and a lower profit margin when you could potentially make the same amount with a smaller business at a higher profit margin? What is the benefit to you above and beyond the dollars?
Maybe you want to grow your business so that you can sit in a CEO seat rather than that of the creative director or lead of the service. Maybe you want to build a company that will become sustainable on its own one day so that you can either sell it, open another company, or go into business in a completely different industry and do something else, while also getting an income from the other business.
At Boss Project, we can totally see the benefit of running a business on a much smaller scale! But because we have one another’s support and the support of an amazing team, we love to lead at this level. It has taught us so much that we wouldn’t have otherwise learned.
The Difference Between Annual and Month-to-Month Profits
What is your lifestyle worth to you? You can make more money and do a lot more work, or you can do less work, but a different kind, and make similar money or more by scaling up. It takes more effort to leap forward, but the dips are less significant because they don’t always completely wipe you out. When we started, we didn’t have a traditional pay arrangement. We got paid when clients paid us. We’ve seen a lot of variation for ourselves and our clients. That doesn’t go away as you scale.
Annual income and monthly income are different, and they look different for everyone. We often talk to our clients about the value of building three to four months of operating expenses. You are likely to have peak times of the year and slower months of the year, and your income can go up and down. Thus, you need to have a security net. To start, it should just be everyone’s salaries, but above and beyond that, you should get to the point where you have full operational expenses times three. We have tried to reframe the way we think about money, to allow it to be less of a vanity metric and more about how our lifestyle has shifted towards what we want.
There’s a misconception that you always need to be making more, and that you always need to be growing. While there’s no blanket advice (because everyone has unique situations that need to be considered), we find comfort and support at a 50% profit margin. That’s a lot easier to maintain long term. Forecasting and mapping out a plan and a budget for you and your team is something that we do for our executive coaching clients, so if you are ready to scale, or scale past a contractor or two part- or full-time employees, and you want to figure out what would be needed, we would love to hear from you! Slide into our Instagram DMs or book a chat with Abagail.
Quote This
It’s not a sustainable business if you as the owner can’t earn a living from it.
Highlights
What Profit Really is and How the Relationship Changes Over Time [0:14:09]
Why Your High Profit Margins Might Not Actually Mean Shit [0:20:04]
The Difference Between Annual and Month-to-Month Profits [0:29:08]
Today’s Guest:
Abagail & Emylee
The Strategy Hour Podcast
The Strategy Hour Podcast is a twice weekly show hosted by Abagail Pumphrey and Emylee Williams, the founders of Boss Project. Join us for semi-ranty biz conversations for service providers looking to ethically grow their agency businesses. Episodes cover everything from lead generation to leadership mindset to team culture and beyond.
Key Topics:
Scaling, Growth, Profit Margins, Salary, Profitability
