Today we’re going to run through a simple profit first assessment you can make on your business that will quickly reveal the naked truth about where you are at.
Before we jump in though you have to remember to be honest with yourself and keep your eyes open. Even if you’re scared of what the numbers may reveal, you need to be ready and willing to see the truth of your situation if you’re going to make profit a priority.
Take a look at the table below:
This is the Profit First assessment form that we’re going to be using to get down to brass tacks in your business. You should either print this page out or use a blank piece of paper or a spreadsheet as we work through the assessment.
- The very first thing you should do is fill out the Top Line Revenue cell. This is your total revenue for your service business over the last 12 full months and you should be able to get this number from your accounting system, whatever that may be.
- The Material and Subs cell is where you put the cost of delivering your service derived from the cost of materials and money spent on subcontractors. If you directly employ your people and go through payroll, don’t include those labor costs here. They’ll be going under Operating Expenses.
- Subtract the Material and Subs number from your Top Line Revenue number to calculate your Real Revenue, this is the real amount of money your service business makes and maybe a real eye-opener for you. It’s very common for entrepreneurs and business owners to get caught up in top-line thinking, but Real Revenue is a much better-starting place to assess whether your business is healthy or not. It’s also important to realize the difference between Real Revenue and Gross Profit as we’re not counting your employee’s time yet. To simplify things, we’re including those labor costs under Operating Expenses and not as a cost of goods sold.
- Now that you have a Real Revenue number, fill out the Profit cell with the amount of cumulative profit you have in your account from the last 12 months.
- In the owner’s pay cell, put down how much you paid yourself and any other partners of the business in regular payroll distributions.
- In the Taxes cell, write down how much money you’ve paid in taxes over the past 12 months, plus any money you’ve reserved for taxes.
- For Operating Expenses, add up the total expenses you’ve paid over the last 12 months, minus profits, owner’s pay, taxes, and the other numbers you’ve already accounted for in the above cells. Quickly double-check your numbers. Your profit, owner’s pay, taxes, and operating expenses should add up to your Real Revenue number. If they don’t, you’ve made a mistake somewhere.
Next, we’re going to use the following table to determine if you’re over or under where you should be in each category.
Use the Target Allocation Percentages to calculate what the numbers in each cell should be, based on the Real Revenue Range at the top of the table. If your Real Revenue number is $700,000 for example, use the percentages in column C.
In the Bleed column, take your actual numbers and subtract the PF$ numbers. This is the amount of money you need to make up if you’re in the negative. For most service businesses, they are bleeding out in the profit, owner’s pay, and taxes sections and have an excess in operating expenses. The final column is where you determine The Fix, whether you need to increase or decrease the allocation in that category.
When you’re done you should have something that looks like this:
In this example, the business may sound impressive if you come at it from the top-line thinking perspective. $1.2 million is nothing to sneeze at, but the numbers tell a different story. At $5,000 in profit, this business is one bad month from going down.
So that’s the Instant Assessment, where is your business on a scale of healthy to flatlining? Are you surprised at any of the numbers?
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