Just wrapped up a meeting with our accountant to review profit/loss numbers. We do this monthly. It’s essential that you know your numbers & lock in your profit.
For the first few years of our agency, the only accounting mechanism we had in place was a bank account and a spreadsheet. The money came in & went out as fast as we made it. Once we got to about $1M / $83K monthly we noticed our profits started to contract.
Our income was growing but our profit was in the decline.
Two things really helped to get things back on the right path to consistent profitability:
✔️ Meeting with the accountant & reviewing the P&L every month. You can’t measure & improve what you don’t track!
✔️ Committing to taking a profit every month. I don’t know about you but I am often tempted to “reinvest” in the business. We tell ourselves that for a month or two we might not profit but eventually, it will get back on track. That is nonsense. You must take a profit and you must pay yourself every month otherwise what are you doing it for? We are in business to make money.
There were two books that really helped in this regard:
✔️ Simple Numbers by Greg Crabtree
✔️ Profit First by Mike Michalowicz
How are you doing in this area? Do you know your true monthly profit? Are you reviewing your financials consistently?
Resources and People Mentioned:
Hey, this is Josh Nelson and just wrapped up our monthly meeting with our accountant and looked at our profit and loss. And it reminded me the time that our agency, where we were just kind of willy nilly, we would sell clients, collect revenue, go out and do the work and distribute to ourselves as we saw fit and really didn’t know how much money was coming in, where it came from other than what was in the bank account. And because I talked to a digital marketing agency and they see this is a relatively common trend, right? We think about revenue, we think about revenue and it’s like, we did half a million or we did a million or we did three million or whatever the number is. And the fact is revenue is just a vanity metric, right? It’s not about how much you make, it’s about how much you keep, right?
Who cares how much money you generated if you didn’t get to pay yourself and you didn’t get it to create any wealth with that income. I’d love to hear from you guys. Do you agree with that concept that you know, revenue really isn’t the most important thing. The most important thing is profitability.
And so as we grew our revenue and we were so focused on the top line, it felt like, or actually the reality was we were making more and more money, but we were also taking on more and more expenses, hiring people, investing in new systems, increasing our advertising expenditures. And while our revenue was going up, our profitability was actually going down. There were months where we had record revenue and the amount of money we had to pay ourselves was backwards. We were actually going in the hole as the revenue went up. And this created a major concern because it’s like, wow, we’re working super hard, we’re doing great work for our clients, but we’re not actually getting anything out of it.
And so a couple of things really helped us turn this around. First of all, we read the book Simple Numbers by Greg Crabtree. I’ve got the link in the comments here to that book. And really it was just the fact that you have to, know your revenues, you have to know your profits. And if you’re not retaining at least a 10% profit after paying yourself, you’re really just a break-even enterprise. And so it kind of got us thinking about, well wow, we’ve got to track this a little bit better, be a little bit smarter with how we manage these finances.
And the other thing we did was we started to commit to meeting with our CPA every single month. And then we, chose to do it live and in person, because it was like an anchored thing. We meet with them, we look at the profit and the loss, we have a conversation around it. And what I’ve found and what I know to be true is that what you measure, what you measure improves, right? And so as we started doing that and becoming very aware and here’s how much money we made, here’s what our costs were, here’s how much profit was left. We started to very consistently and predictably generate profit and get a nice consistent profit margin within our business, which of course enabled us to continue to grow and which would, of course, enabled to us to continue to be inspired to grow our business.
And so I just want to say to you, if you’re struggling on this front, just make a simple commitment that every single month you’re going to look at the revenue, you’re going to look at the profits, and as you find that the profit isn’t there or the ability to pay yourself isn’t there, you have to make some changes, right? You have to reduce expenses because the propensity is, and I experienced it myself, I see a lot of agencies experience it, is I’m going to invest in the business and eventually I’ll be able to pay myself more. Eventually, I’ll be able to take a profit.
My first business, DevelaComm, we were building websites and doing hosting. That was a perpetual loop in my mind. I generated five grand. I invested it in this. I replied it into that. I wasn’t able to pay myself. I wasn’t able to take a profit. So you create the habit of not taking a profit and it’s really your duty to ensure that you get paid as the business owner and to make sure that your business takes a profit.
So first of all, just commit to that. Commit to manage and know the numbers, to track the numbers. And there’s two great books I really recommend you check out Simple Numbers by Greg Crabtree and another great one called Profit First by Mike Michalowicz, and Mike Michalowicz maps out a beautiful process and a beautiful system for just really knowing that you’re going to get a profit every single month. And so I definitely recommend checking that out and researching. And I’m a big fan of the profit first methodology.
So love to hear from you guys. How are you doing on this front? Are you committed to profitability every single month? And just two simple things. Go read Profit First and commit to, no matter what, every month look at profits.
So that’s all for now. I’d love to hear from you guys in the comments. I’ll talk to you later.