Do you compare your businesses numbers to other "healthy" businesses?
When you go for your annual physical, the nurse takes a set of vital signs, or measurements. They take your temperature, blood pressure, pulse, and listen to your heart and breath sounds. They also measure the oxygen saturation in your blood.
The medical profession knows that by assessing this small number of vital signs, they will be alerted to potential problems. It gives them a starting point to assess your health and condition.
What about taking the Vital Signs for your business and assessing if it is “healthy”?
Business owners tend to put their nose to the grindstone and that can cover up an unhealthy business. See if any of these thoughts run through your head (like they do mine):
“I just need to work harder.”
“I just need to get organized.”
“Something big is going to happen one day and the business will be fine.”
“Something just like magic will wipe away all the debt, financial stress, and worry.”
Is your business surviving check to check? Do you manage your business by checking the bank balance, rather than how you are spending against a budget? Or the worst mistake of all: are you listening to your accountant and “minimizing” profits, so you don’t pay taxes on them? Don’t get me wrong; I adore accountants. I graduated with a double major in Accounting and Finance for pennies sake. But their view of your numbers SHOULD NOT BE YOUR VIEW OF YOUR NUMBERS!
In other words, you must take your business’ Vital Signs differently – and not from your Profit & Loss Statement.
In his 2014 book Profit First, Mike Michalowicz reveals why the traditional accounting formula: Sales – Expenses = Profit is not only contrary to human behavior, but a recipe for exhaustion because it throws you into an ever-ending cycle of selling more and profiting less.
It treats profit as a left-over. And undesirable. That is CRAP. How does it make sense to spend $10 so you don’t have to give the IRS $ 3? Wouldn’t you rather have the $ 7 in cash PROFIT than nothing?
Besides teaching you to run your business differently, Mike flips the accounting formula to:
SALES – PROFIT = EXPENSES
He has you take your HARD EARNED, WELL DESERVED Profit out FIRST, and run your business on what’s left. Remember Warren Buffet’s “Pay yourself first!” mantra? Exactly like that but for your business.
And the gold doesn’t end there. He also gives you a quick assessment tool to use to take the Vital Signs of your business.
Get ready to find out your business’ health …
This chart is from page 68 of his book and provides, at a glance, a quick assessment of your business’ financial health. Take out your last P&L and see how your business compares.
Note: It is important to note that he uses the term “Real Revenue” not Sales. If you are a manufacturer, retailer or more than 25% of your sales are derived from the resale or assembly of inventory, you must deduct the amount of the materials (not labor). If subcontractors deliver the majority of your service, deduct the cost of the subcontractors from Sales to get Real Revenue. Read the book for more information.
In my business coaching practice, I begin all discussions with a client by having them do this assessment. It helps them see immediately what areas are “bleeding” in their business.
Because numbers don’t lie. Just like your blood pressure number can signal a problem or good health, these percentages can help you pin-point what the business needs to focus on.
So how is your business doing?