There’s a leak somewhere. You can hear it. Drip. Drip. Drip. If this keeps up, your whole house will be flooded. Naturally, you will find the source of the leak and either fix it yourself or hire a professional to do it for you. We don’t leave leaks unaddressed in our homes, so why do we allow our profits to continually leak out of our businesses?
As small business owners, we’ve got a simple decision to make: Will we continue to exhaust ourselves, working to just get by and maintain the status quo, or will we decide to stop the leak and begin to enjoy the potential profits in our businesses? Thousands of businesses, both big and small, are just barely getting by. They make it month to month, surviving with “on paper” profit but with little to no real cash flow. If this sounds like you, how can you find a solution for your business?
We have all been there: chasing the mighty promise of profits, only to end the year with nothing to show for it. I made a number of mistakes and finally decided that I’d had enough. The perpetual hamster wheel was getting me nowhere. That’s when I decided to dig into my numbers. I pored over the financials trying to simplify the rows and columns of numbers and figures on my P&L and balance sheet. The business seemed to be running well, except for the glaring fact that I had very little cash profit to show for all my effort.
That’s when it hit me, like someone was banging a huge gong inside my head. I was overcomplicating the whole thing. Keep it simple, stupid. What’s the one thing that defines your business? How do you get paid? For the vacation rental business, it’s a reservation, a turnover, a guest departure, or a checkout.
I realized that I didn’t need to have fifty different line items in my P&L, and I decided to simplify the financials to its most basic form. Profit is traditionally calculated by subtracting your expenses from your revenue (Revenue − Expenses = Profit). This is not rocket science. What I saw was that I was looking at my financials too broadly. As I drilled down and looked a little closer, I began to find the leaks. They weren’t just small leaks, either. It wasn’t just a drip. There was a steady flow of money leaking out of the business. I felt sick to my stomach. I had fought tirelessly to grow my business, thinking that growth would result in higher profits. I was wrong. My mind raced back, and I quickly calculated what I had lost due to my inability to see this in the past. It was several hundred thousand dollars. I needed a drink.
The night of this realization, I couldn’t sleep; it was like I was haunted by little personified dollar bills. They were chasing me around in my dreams. I kept waking up, thinking about all the money I could have made, thinking about how different the business could have been if I’d seen this earlier.
Then it came to me—the reason for my leaking profits. I shared the reason with a good friend of mine (we’ll call him Teddy), who had asked me to help him with his business. When I first shared my idea with him, he looked at me blankly and then he said, “There’s no way I can do that. I want to grow my business. If I do what you say, I won’t be able to support my growth.” I tried to explain my idea to him, but he didn’t get it. I wanted to shake him and yell, “Dude, listen to me!” I didn’t. I just shrugged it off and helped him focus on his challenge at the time. It turns out that there are often several issues affecting profitability, but for him, there was one glaring issue.
A couple of months later Teddy called me, frantic. He said, “You were right. You were right! I just checked my expenses per property. I average $125 per turnover. That includes the cost of marketing, reservations, guest relations, accounting, and administration [his total cost per turn]. On some of my properties, I only make $120 per turnover. I’m losing money by managing these properties. Holy crap, you were right! I need to cut some of these properties. I’m making no profit on any of these properties!”
What I had discovered, and what Teddy eventually discovered as well, may seem counterintuitive at first. Decreasing the number of properties in your inventory (or clients you serve) can in fact improve your bottom line. You try to rationalize it; “Self, they are covering my overhead. My gross sales are off the charts. I am crushing it! If I cut them, then I’m not growing.”
If you are honest with yourself, though, you know that they are the reason for your ridiculous overhead costs. You’ve hired more personnel just to cover the day-to-day activities required to service those clients. You don’t have time to train all those employees, so frustrated employees leave to find greener pastures, or, worse, they stay and bog down your inefficient machine. Nevertheless, you had this grand vision that you needed to be the biggest and baddest [insert your title and dream jobs here] on the planet. You thought that by growing your business as large as you could, you would naturally reap higher profits. Unfortunately for you, and for most businesses in the world, high gross sales do not necessarily mean higher profits.
Someone once told me, “Volume fixes all your revenue problems.” I couldn’t disagree more. Gross sales and volume do not fix all your problems. They can actually exacerbate your problems. Do you have poor profit margins on a specific client? Do you think it’s a great idea to pick up one hundred of those clients before you know that you have poor margins? In this case, two negatives do not make a positive. It makes one huge problem.
I’m no accountant, but I think somewhere along the way, we overcomplicated the way we manage the financials of our businesses.
Granted, maintaining accurate financial statements is imperative if you ever want to sell your business or if you want to keep Uncle Sam off your back. There are great accountants out there for that. As a busy manager of a thriving small business, you don’t have time for that. You need to focus on your business and to focus on your profit above expenses and gross sales. Growing sales tends to boost our egos, which subsequently fuels an expense-driven fire that eventually burns down our businesses. And we wonder why so many businesses fail! There’s a beautiful mix between gross sales and minimal expenses that will make you profitable. I’d encourage you to simplify your business financials as much as possible; in fact, try to find the simplest metric in your business that will help you easily identify your profit potential (think like Teddy did). I don’t know your magic number, but I’m certain we could figure it out.
Below are simple steps to help you push your business toward profitability and sustainability. It would be silly to think that these would fix every problem in your business. They won’t necessarily make your business run like a well-oiled machine, but you should no longer be driving a Ford Pinto.
7 Ways to Foolproof Your Business
1) Define Your Vision.
Focus, focus, focus. Stop acting like a squirrel, chasing every distraction under the sun. Focus on the verticals with the most opportunity. While you’re at it, mathematically define what that opportunity looks like. Does it meet your profit requirements in the next step?
2) Simplify Your Financials.
Revenue − Expenses = Profit. I like to know the conclusion first. If I know where I’m going, I can get there faster: Profit = Revenue − Expenses. There we go. I feel better now. Profit! Set your profit margin. Be realistic. Adjust your profit margin. Try to focus on transactions that will meet your profit requirements. There will be times when you negotiate and reduce your profit, but don’t sacrifice too much.
Simplify your financials. For each client and each widget, do you meet your required profit margin? If not, what’s going on, and can you adjust the variables?
3) Standardize Your Business.
Create standard operating procedures (SOPs). What makes your business run smoothly? How can you re-create that process? Test it. Test it again. Write it down. Now you have your standard operating process. Repeat those steps until you have documented all the day-to-day routines in your business.
Create HR manuals. Vacations, sick days, payroll, benefits—all these policies need to be documented. You also need to comply with state and federal regulations for how to treat your employees. Your goal is to keep from having any lawsuits and to make sure everyone is treated fairly.
Articulate Job Descriptions. You can’t manage what you can’t measure. You can’t measure what you haven’t defined. You need to be sure to document your expectations for all the roles within your business. There are a plethora of job descriptions online for almost any position you envision.
4) Train, train, train.
You have to replicate yourself and all your best employees. Here’s the truth: you are going to burn out. OK, maybe not tomorrow or next week, but soon. Then again, maybe you won’t burn out, but you will want to enjoy your life outside of work. Life is too short to work all the time. Create your clones and encourage them to create theirs.
5) Find a mentor.
There are lots of experienced guys and gals who have already gone through what you’re going through. Their experiences have given them wisdom that you could use. My wife would laugh at that previous sentence. It has taken me a long time and a lot of mistakes to begin admitting that I need help, but I do. I don’t know everything, and I need help. There’s no need to reinvent the wheel. Find someone who’s been where you want to go and ask that person for advice. If he or she won’t give it to you, annoy him or her until he or she concedes to your nagging. Once you find a mentor, go ahead and lose your pride. He or she will bust your chops. It’s good for you, and you need to be humble enough to listen to his or her advice.
6) Marry your people with technology.
Utilize your people for what they were intended to do: have and develop relationships. Use technology to manage the portion of your business that computers can handle. Computers weren’t created to build relationships, and people weren’t built to be logic-driven, data-crunching machines. Leverage the strengths of each and see your business take off.
7) Put your people before your business.
Putting people first doesn’t mean hiring people who are unqualified. Your employees are the most important asset of your business. Cultivate and care for them, and they will help you achieve your vision.
I remember, when Pop, my step-grandfather passed away, how many people came to his funeral. I had only known him for a couple of years, but I was impressed with how loved he was. I didn’t realize the extent of that love until a couple years later. I was hanging out with one of Pop’s friends, William. We were chatting over a few cold beers, and I told him that I wanted to eventually run my own business, and impact people the way Pop had. He exploded! Think grizzly bear attacking a small child, except that I was a grown man and might have peed myself. I played dead. William screamed at me, “You’ll never be half the man Pop was. Your Pop saved the lives of half of the people in that town we live in. Don’t ever think that you’ll be even near what he was.” I thought about what he said later and continue to think about it every now and again. Life is built on relationships. Life excels on relationships. William wasn’t mad at me because I thought I could be Pop. William just wanted me to understand that Pop sacrificed so much for so many, thereby endearing himself to his employees. A leader must first serve; William taught me that was how Pop inspired him. I wanted to be like Pop.