If you’ve been in business a while you’ve almost certainly encountered Generally Accepted Accounting Principles (GAAP) accounting. It’s the standard way entrepreneurs have been crunching the numbers for their businesses for nearly the past 100 years.
But there’s something very dangerous at the heart of GAAP accounting… It’s the reason why so many businesses turn into cash eating, life-destroying monsters.
The fundamental way GAAP accounting works is this:
Sales – Expenses = Profit
You take your top-line revenue and subtract your fixed expenses plus any other costs associated with selling, and whatever’s leftover at the end gets counted as profit, if there is anything left at the end.
It’s completely logical and makes mathematical sense, but there’s one fatal flaw with the system and it’s the main reason entrepreneurs find themselves staring at an empty bank account and seemingly endless bills to pay.
The problem is GAAP accounting goes against human nature.
What we tend to focus on grows, and GAAP accounting puts Sales and Expenses front and center. Profit is an afterthought.
We focus on growing revenue. Sell at all costs, literally, in many cases. We sell and sell, thinking that will get us out of our current predicament, and that justifies hiring more people, spending more money, and doing whatever we can to get those sales and increasing revenue. Expenses grow as a result and because we haven’t addressed the root of the problem we end up in the same place with everything magnified.
A bigger business with bigger expenses, bigger payrolls, bigger bills, and even more stress.
Just as tasks tend to expand to whatever amount of time is allotted to them, humans tend to spend whatever money they have available, and entrepreneurs aren’t any different. Service business owners often rationalize spending more as just a part of doing business. You’ve got to spend money to make money, right?
GAAP accounting is leading service business owners astray, but there is an easy solution to the problem and it’s been staring us in the face the whole time.
Focus on Profit First
We’ve been looking at the GAAP formula wrong this whole time. Remember what I said before about what we focus on is what grows?
In order to leverage our innate psychology, all we need to do is flip the variables in the formula around a bit and rearrange our priorities.
Sales – Profit = Expenses
Let’s put Profit right up front along with sales. This simple switch in thinking aligns our accounting with human nature and creates a system that reliably creates cash flowing businesses all the time.
Profit First is the key, and if you want help implementing Profit First in your service business so you can keep more profit in your pocket instead of constantly running away from a cash eating monster, you can click here to reach out to me. We’ll dig into your business financials and come up with a plan to put your profit upfront, right where it needs to be.