Profits First: How to increase your bottom line by spending less
I love my first business. As a studio owner, I naturally excelled in member experience, sales, and staff retention. These flowed inherently, and my studio thrived because of it. Before you run for the exit button, it wasn't all sunshine and roses. Let's talk about what I had to work on month after month and what I see my clients struggle for, too; how to manage monthly expenses strategically. Does the following sound familiar? Each month I would excitedly watch my revenue come in, consistently higher than the month before, and I would think, "this is going to be our best month ever!" Then I'd reconcile at the end of the month and think, "what the heck happened? How did we lose money again?" The more money we made, the more money we spent until I felt like I was on a vicious hamster wheel that was out of control.
It turns out I was in good company. This phenomenon is known as Parkinson's Law and is one of the best-known rules of wealth accumulation. It explains that, no matter how much money a person earns, they tend to spend the entire amount plus a little more. In other words, if your expenses rise in lockstep with your earnings, you've found yourself living Parkinson's Law. Ironically, I excelled at this in my personal life (I'm a true accountant's daughter). Still, we joked that my studio was my spoiled mistress- whatever she wanted, she received- until I wasn't bringing home any more money, no matter how much my gross revenue grew.
One year in, I needed a book to take to the community pool and decided to take Profit First. It had been sitting on my shelf for six months because, let's be honest, it didn't sound like an enjoyable read in the middle of my MBA program full of dry business books. Luckily, I grabbed it on my way out the door and was instantly hooked. I called my husband and asked him to bring me my laptop, a highlighter, and post-it notes, and then I spent the rest of the day binge-reading Profit First and highlighting pages like I would be graded on the material. That was in August. I implemented the process in September, and I had my biggest month to date in October. It continued to grow from there until I had reached my profit goals 18 months later. I know it sounds like a fairy tale if I skip all of the work that went into it, but my clients can vouch that it's not as daunting as it seems once you set it up. What I needed were a mindset shift and some intelligent spending strategies. Let's break it down so you can implement them, too.
A Disclaimer
I'm not sponsored by Profit First (although considering I implement it in all of my clients' businesses, I should be), and the process isn't anything mind-blowing. The author, Mike Michalowicz, simply turns the traditional GAAP formula upside down. You've likely learned that
Revenue-Expenses=Profits
Michalowicz swaps it to state that:
Revenue-Profits=Expenses
If most people spend every dime they make and then some, reversing the formula to make it so you can only spend what's leftover is, honestly, life-changing. Although I can't walk you through how to set it up in one article, I wholeheartedly recommend that you read the book, and then I can help you implement it in your business automatically. What I can do now is teach you the most critical step to do ASAP- how to redline.
Before We Dive In
One of the first tasks I give new clients is to conduct an expense audit to see where their money is going each month. Chances are, you're spending more than you need to, which means your revenue is trickling into your expenses rather than being reinvested in your business or deposited in your profit account. When we think about strategies to increase your small business's profitability, our focus is often around mastering your marketing plan and improving your introductory conversion rate, which are both crucial. But if you're only concentrating on how you can grow revenue, you're only looking at half of the equation. In order to maximize your studio's profits, you need to earn more income while you decrease your expenses simultaneously. I wrote about this in more detail here, as well.
The formula checks out - the less you spend, the fewer memberships you need, and the more money you have to work with at the end of the month.
Let's set it up
Print out all of your credit card and bank statements from the previous year and organize them into stacks by month. 12 months of information will ensure you catch any sneaky subscriptions and annual dues.
Dig out two pens of different colors. I prefer red and blue, but anything other than black will work.
Grab a separate piece of paper or spreadsheet so you can tally up your savings as you eliminate them from the budget. This one's fun, so try not to skip it.
Why am I having you print everything out when I preach google drive like gospel? This process can get confusing, and in this case, going back to basics where you can physically cross something off will help you stay organized.
Step Two- Classify
Grab your red and blue pens and go through your first statement line-by-line. For each expense, ask yourself, "Is this expense crucial to my business?" If the answer is a resounding "yes!" then ask yourself, "can I find it cheaper?" Anything you will negotiate should be circled blue. If you don't absolutely need it (and I mean, you can't run your business without it), you'll circle it in red to eliminate it from your budget. Try to be aggressive with your savings; remember, the less you spend, the more you keep. Profit First suggests that you eliminate 30 percent from your budget, but small fitness studios have tight margins, so I usually recommend my clients aim to cut their expenses by ten percent.
Step Three- Negotiate
If your stomach turned when you read the word "negotiate," stick with me. I also shy away from bartering, which means we're both leaving money on the table that could be going in our profit accounts. Nearly everything is negotiable! Anything you circled in blue or classified as "I need this to run my business" deserves a try. After all, if the support representative says "no," you're in the exact same spot.
Common Negotiable Expenses:
Merchant software - call your merchant processor directly and ask, "do my rates look typical, in your expert opinion?" (I believe it's always a good idea to compliment people who can save you money). They'll let you know if your rates look high and give you leverage when you call your point of sale software service.
Booking and accounting Software- There is so much more competition in these industries than five years ago, which means you have negotiation power. Call up your booking software and mention you're shopping around. They'll put their best rate out there to save you as a customer.
Utilities- Wifi, phone, and security almost always have lower rates, and you just have to ask.
Electric/gas/water- call your company and ask if your reports look high. They'll give you strategies to save (and sometimes a corporate rate discount). For example- if you're heating your 2000' studio all night or struggling with staff who leave the heater running after class (is there a support group for this?), investing in a nest will save you money in the long run.
Step Four: Keep Track
This step is the most fun. Keep a running total of your expenses that you've cut from the budget and watch how they add up. Create a positive feedback loop that makes you feel successful so that you have the motivation to keep at it each quarter. I know it seems like a fluff step, but rewarding yourself and building intrinsic motivation are crucial to creating a long-term habit.
Common Expense Traps
As a coach, I see some common areas where most studio owners get stuck. Duplicate subscriptions are the most typical. Multiple CRM software that overlap or two streaming services that offer a similar product should be consolidated- any opportunity to combine services into one purchase item will save you money. Two $15 a month music services may not seem like much, but if you multiply that by 12, you're spending almost $200 a year that could be going into your bank account instead. Takeaway: Comb through your statements and make sure that each expense is needed and cannot be combined.
Another pitfall many of my clients fall into is the last-minute purchases that add up. Do you swing by Target every time you run out of paper or handsoap in your studio? If so, you're paying markup and leaving money on the table that, again, might not seem like much until it adds up. Here's how to cut those costs:
Make a list of everything your studio purchases monthly, including pens, mat wipes, hand sanitizer, grip socks, and everything in between.
If you have staff, delegate inventory to be someone's job (if you're solo-preneuring it, this will still save you time) and input that grocery list into Google Drive with checkboxes.
Research a wholesale, business-to-business distributor and apply for an account.
Classify your inventory list by where you'll purchase the item. Costco, b2b distributors, amazon business, etc.,- take a few hours to shop around and find the best value for each item. I know it feels ridiculous to price match toilet paper (I've done it), but remember, you can spend it or pocket it. Make that your mantra!
On the first of each month, the person tasked with inventory will walk through the studio and check off what the business will run out of in the next 30 days. They will then take that list and purchase everything needed in bulk.
No more grocery store runs! Everything can come straight to your door, and you'll know you've found the lowest price for your value point. M clients have been surprised by how much they save just by cutting out the last-minute stops, and I love to hear it.
Rinse and Repeat
The first expense audit is the hardest, but once you get the hang of it, you'll be an audit pro in no time. Here are your takeaways today:
Set a reminder on your phone to redline your statements quarterly so you can stay on top of your expenses.
Purchase and read Profit First
Book a coaching call or a strategy session, and we'll set up your profit accounts together.
Step off the expense merry-go-round and into profitable entrepreneurship.
Disclaimer: The profit first link is an affiliate link.
