Does Your Business Work on Paper?

[00:00:00] Excuses. Here I am. So. [00:00:05] Hi, everyone, and welcome to this week's Profit first podcast. I'm Stephen Edwards. I'm the founder of Grow Profit First Accountants. We're a firm of accountants based in Gloucestershire, but serving entrepreneurs throughout the uk, and we're experts in the Profit first system. [00:00:21] So on the podcast, we talk a lot about Profit first, but we don't necessarily always dive into every nook and cranny about the book, because at the end of the day, you guys have got access to the book and we believe the system's fantastic. We, we, we're trained in it, we're certified in it, we get results in it. But actually, Profit first for us is not just about the system. It's not just about the book, it's actually about the. The kind of meaning, the. The philosophy of you as a business owner, even if you're a bigger business, as multiple owners, is paying yourself what you deserve. But we want you to be profitable, we want you to be sustainable, and we want you to be able to hire the right team members. We basically want to help you grow in an easier way. So we cover all things about Profit first, but also anything that's connected to ultimately building a business that gives you the profits you deserve, gives you the freedom, gives you the buffer, gives you the space. So you're not kind of, you know, living paycheck to paycheck, so to speak. [00:01:23] And ultimately you can do the things you want to do in your business, because the truth is, if our profits are not where they need to be, it affects the decisions throughout our business. We hire cheaper team members, we try and cut costs in the wrong places, we take on the wrong type of customers, which is a whole podcast episode in itself. I can talk about that all day long. [00:01:45] We're kind of just not desperate, but we're just focusing on revenue and not trying to build a sustainable, profitable kind of machine. So what I want to talk about today, you know, inspired by some of our clients and when I see people's numbers, you could say it's all about your financial model, but that sounds a little bit wishy washy. Sounds a bit like, like it's jargon. But essentially how I would summarize it is, have you got. Do you know what your numbers need to look like on paper? [00:02:15] Because if you don't know what your numbers need to look like on paper, how can you make it a success in real life? [00:02:22] And I just want you to think about that for a minute. And when I say paper, yes, it could literally be A piece of paper. I've got a digital notepad. It's called Remarkable. Absolutely love it. It's essentially a digital notepad. Yes. You know, an iPad can do the same thing. However, an iPad can also load up the Internet, watch Netflix, play Block, Blast what my kids are obsessed on at the moment and distract you. [00:02:44] Great thing about Remarkable is there's no distractions, it just does one thing. So it could be pen and paper or it could be a spreadsheet. Yes, it could be software, but let's keep it simple. So do your numbers work on paper? And you know, literally, if you've got a piece of paper. Now, what I'd like you to do, and you know, let's turn this into a little bit of a workshop, is write down what a very achievable but nice month. Not too unrealistic because we often chase the exceptions and the good months and we're constantly chasing that high of having a good month. And, and then we resource our business to suit a good month. I've learned that lesson myself in the past. And then when the revenue drops down, we have a really tough time. So I want you to have a sensible month. So let's pretend, for argument's sake, I'm just going to give you some examples. Let's pretend it's £10,000. I'm using £10,000 because it's a nice round figure, isn't it? It represents 100%. 1000 is too low and 100,000 is probably too big for a lot of people. But if you're more that size of business, absolutely do this with £100,000 or even 1,000 if you just got a sort of side hustle. So let's say £10,000 is a normal decent month. It's not bad, it's not exceptional, It's a, it's a decent month. And it might be at the moment that you're relying on 12,000 pound months, 13,000 pound months, because the truth is you've probably got some that are six, some that are seven, and, and when you have the 12 or 13 months, if you have it for a period of time, you start maybe over investing in things or you spend money in the wrong places, you hire that extra and what happens is it, it affects your margin, it affects your gross profit. [00:04:20] One of the things we do at Grow is we educate and we make numbers easy to understand for people. And a lot of people don't necessarily know the difference between gross profit and net profit. So gross profit is, is, is really your sales minus the, the cost to do the thing. So not your overheads, not things like, you know, software subscriptions and you know, marketing and, and electricity and you know, I was going to say filling out the ink cartridges, but most of us don't print stuff nowadays. But it's not really those sort of things. So let's pretend you're a builder and you know your income is £10,000. If you had £4,000 worth of materials and you had £2,000 worth of labor costs, your direct cost would be £6,000, if that makes sense before overheads. So your gross profit would be the 4,000 that's left. [00:05:11] So the problem is when we over staff in good months or we think that's going to be the norm, resources are a little bit too high and our numbers get squeezed. So what I want you to do, going back to your pen and paper is I want you to think about this. All you know, where profit first comes in is how much do you need to earn? So how much you need to earn is a huge part of this. So I want you to have that in mind. So let's say you want to earn £3,000 per month. Now let's say £4,000 per month on £10,000 worth of income. [00:05:43] So what you would do, and again, I'm making up these percentages, it does depend on your business. When we work with people, we look at your numbers, we model it out for you, we look at benchmarks, we study what's happened in your business the last two years, we look at your competitors and all of that. But just to keep it simple, you've probably got a little bit of a sense for this. So £10,000. Put whatever number you want in and let's say that you, your team costs, you have to pay team members to actually do the thing. You're paying team members to fulfill the service or whatever it is for your customers. You haven't, you don't buy and sell stuff, but you've got paid team members. And let's say your team members is £4,000. [00:06:20] So what that means is you've got £10,000 sales, you've got £4,000 cost of sales for your team and that gives you a £6,000 gross profit. That happens to be 60% gross profit. Okay, we know you, you need to earn £4,000. So that means the overheads need to be £2,000. [00:06:40] So we take away £2,000 overhead. So the six turns into four and that gives you a £4,000 profit. [00:06:47] And you might be thinking Steve, that sounds so easy, that sounds so simple. You know, you guys supposed to be accountants, are you meant to be experts? But here's the point. I want people over complicate numbers. You got to start with a simple premise of what does good look like, what does normal look like. So if your benchmark is, and you can apply this for your business, for every £10,000 or the sales that comes in, 40 of that is my team cost to do the thing, to do the work, that leaves me 60 left, which would be 6,000 pound in this example. And 20 is my overheads and that gives me 40 profit. And the truth is sometimes these numbers might be high for people and I'm just kind of making up these percentages. But let's say we benchmarked it for your business and, and they were your numbers. [00:07:36] We then, wow, they are the numbers we feel you should be aiming for. And I've done this exercise with somebody recently, actually quite a decent sized business with a team. [00:07:44] I've actually done my own business, I review it on quite a regular basis. We then look at where are you now? So it might be that that same business, £10,000 worth of revenue, they're paying instead of paying 40% for the team, they're paying 50%. [00:07:59] Okay. And that leaves them £5,000 gross profit. And it might be their overheads are 30% as well. So that's another £3,000 that comes off, that gives them 2,000 pound profit for themselves. [00:08:10] So we want to get to four, but we're currently at two. But you've got to start with what does good and what does normal look like. And this is when I said at the beginning, does your business work on paper? Because if you were to look at what's happening with your business at the moment, we're seeing businesses where that bottom line in that example might be £1,000. So it might be they're making a 10% profit on £10,000 and actually we feel they should be aiming towards 40% and that can absolutely change their life because it's a 4x in their profit. And that's essentially what profit first is about. It's what we do, we call it a profit assessment. If you read the book, there's a section in there saying you can do an instant profit assessment. If you Google Grow Profit first accountants. Grow Profit first accountants Instant profit assessment. You should find a link. I'll put the link on the podcast to do an instant profit assessment. That gives you a little bit of a guide. It gives you a benchmark but you've got to start with what does good look like for you. And then we figure out what's going on and we need to slowly but surely move you in the right direction. But if you don't have this plan, as I said, if you haven't got a plan for your numbers on paper, how is it going to be a success in real life? [00:09:22] And you could literally start with a piece of paper. Yes. We could get more complicated, we could put it on a spreadsheet, we could pull it on software. We've got tools, specialist tools, and we have got software. But it's quite simple, it's core. And I would literally, if you're reading or listening to this now, I would do that exercise for your business. [00:09:40] But if you, if you don't really know where to start, you don't know what your numbers need to look like, by all means, reach out to us whether you're a client or not a client. If you're a client, we're explaining to you because not everyone in our client base does profit first at the moment. We'll talk a little bit more about how that works. If you're not a client, we're more than happy to also explain what we do. But if you go onto our website, we are grow. So we a r e we are grow. Gro.co.uk and in the top right corner it says how we work and you will just. There's a video, then it talks a little bit about what we do, but by all means, reach out and hopefully that's been useful. Guys, speak to you soon. Excuses. Here I am. Sorry.