“A lack of profitability is consistently the major reason cited for business discontinuation,” - Mike Michalowicz.
In his book Profit First , Michalowicz goes on to say that 8 out of 10 business owners fail due to lack of profitability. This post is to encourage you to help discover your authentic profit and help you tend to it well. Let’s define some terms real quick:
NET PROFIT: Net profit is the difference between what you make and what you spend. However, what you spend on the profit and loss report is not all that you spend as a business. There are other expenses (assets that cost money) that remain on the balance sheet, but the balance sheet isn’t a report that reveals your net profit. It is there for accounting purposes.
CASH FLOW: Next, we have the cash flow document its goal is to combine net profit + asset expenses – cue the CPA’s crying as they read this! CPA’s don’t want these areas merged together for tax purposes.
While I understand this, this exercise is not for tax purposes. This exercise is for the financial health of your company. Both can exist and both can be tracked properly. As business owners, we need to merge them. So, my formula for Authentic Profit is the following :
Income - Expenses - Asset Expenses = Authentic Profit or True Profitability.
*Asset Expenses include:
Liability payments & Shareholder distributions. We exclude asset responsibility because this is not something that can be liquidated to pay payroll, if needed. Authentic profit, as a reminder, is a great tool to show true cash that can be utilized to keep the doors open and the lights on to run your business.
Knowing the Authentic Profit of your company is the cornerstone of running a successful, lifegiving business. Remember – authentic profit is the 20% of funds not covered up by advancements via line of credit or a rolling credit card balance.
As a business owner, if you use your authentic profit as your gauge for growth, I promise you will live a happier, more balanced life. In my opinion, growth does not always mean more sales and greater income – although greater income is needed! Growth comes when what you have is managed with excellence. This goes deeper than just numbers in a bank account. This sets your heart in alignment, by seeking financial health from the bottom up. This is a priority!
Authentic Profit can’t always be seen or communicated the same way that the growth of a new product, greater sales, or new client acquisition can, but this true profitability is the heart of your company! When tended to with excellence, true financial growth will come.