How to Make More Money with the Same Net Income
I ran my successes by my mother a lot when I was first getting started. She’s been an entrepreneur herself for more than 30 years, so she’s always a source of great advice and reality checks. I remember calling her years back, exhilarated because I’d just had my first $1000 day. As happy as she was for me, she moved immediately to question I should have been asking “How much did that put in the bank?” I was too excited at the time to be as thoughtful about that question as I should have been, but it’s become a focus for me since I recently finished Mike Michalowicz’ Profit First.
My new stand is: what matters is cash. What matters is what’s in the bank. Do I really want massive revenues (and all the new tax and legal obligations that come with each new level) if I’m only scraping a smaller and smaller amount off the top? Do I really want to pour so much of my money into growth when I could increase my profits at my current level without adding a bunch of new responsibilities for myself?
I’m focusing on a plan to maximize my profits that allows me to begin maximizing, presented here as a plan you can follow along:
Set up the Right Bank Accounts
You’re going to want to set up at least seven bank accounts. I’ve explained a little about them…
- Income: This is the account where all of your income comes in and then is distributed to the others.
- Operating Expenses: This account contains the balance for operating your business
- Profit: This holds the excess from every other account, we love this account
- Taxes: This holds your reserves for covering tax obligations
- Owner’s Compensation: You have to get paid. Pay yourself here.
Getting it all to the right place is going to be a bit more of a challenge, but that’s where step 2 comes in.
Allocate the Proper Amount Every Month
I took this graphic right from the book, and I think it’s a really good rule for allocating the right amount to the right account:
My company is over there in column D. Based on the research in this book, I’m a healthy organization if I can devote 10% to profit, 10% to owner’s compensation, 15% to tax and the remaining 65% to operating expenses. As you can probably guess, I wasn’t quite there yet. Operating expenses were consuming what should have been a lot of room for my other expenses, and that’s where I got my next step.
I wanted, as an incentive for myself, to find a way to cut 10% of all my expenses, and move it over to my personal compensation.
With all of my expenses in one place, I broke them into three categories.
1) I don’t want this, and I’m not paying for it anymore
2) I want this but I can’t pay this much
3) I need this
The first thing I did was call up the #1 and let them know I was cancelling immediately. Annoying but easy. After that, I started calling all of the #2 vendors to let them know I wanted to stay, but I needed a bargain. I got some of them down to as much as 50%. For all of the ones that were left, I knew why I needed them.
This process worked for me very quickly. On my first try, I was able to move 10% over without losing anything I couldn’t afford. Now, I’m beginning the process of going through all of the other accounts (the ones listed above) and doing the same thing.
I bet I can cut down the operating expenses even more. I’m sure I can improve my tax margins, too, with the right arrangement. I’m looking forward to seeing what comes next, and I would love to hear from anyone who is thinking about giving this plan a try.