Why You Must Make a Profit to Make an Impact and Why Profit is Not a Dirty Word: Part 2 More Money Myths

 
Not+Good+at+Math.jpeg

Money Myth 4:
You’re not good at math…
&
Money Myth 5:
… therefore/or you’re not good at business

Have you ever uttered the words “I’m not good at math?”  Maybe you are maybe you aren’t. All I know is that this statement is far more common than “I’m not good at reading.” Personally, I think we should just stop telling ourselves we aren’t good at math and maybe it will be a bit less scary. But ok, maybe you had an algebra teacher that gave you the evil eye. Maybe you were told that you excelled at art or humanities and that those subjects were somehow incompatible with quantitative disciplines. Maybe numbers just put you to sleep.  Besides, if you are going to change the world, money shouldn’t matter, right?

However you want to phrase it, a fear of numbers is too often an excuse to just opt-out of truly understanding and taking responsibility for the financial management of your business, or even your personal finances. 

And that’s not the only excuse. Here are a few more accounting-related excuses, for good measure:

  • I will do it later, I just don’t have time for it right now.
  • I’m worried about keeping the business afloat or paying the bills. I need more revenue and I can’t think about the details right now.
  • The finances are too complicated. I don’t have time to understand all the ins and outs.
  • I tried to use QuickBooks (or insert confusing accounting software here) and now everything is a mess.
  • I can’t afford it.
  • I just send everything to my accountant at the end of the year and they tell me how much I owe. (Meanwhile, any number of other financial frustrations are keeping you up at night).

Rather than dismantle each of these, one-by-one, I’m going to topple them all in one fell swoop by reiterating what they all have in common – they are excuses for not dealing with crap that you don’t want to deal with. Here is why you need to stop making these excuses and start dealing with the numbers and the money running through your business (or your personal bank account).

Money is the lifeblood of your business (thanks to Mike Michalowicz for the metaphor).   On a personal level, money fuels your ability to act in the world. Without it, you stand on the side of the highway with a cardboard sign. (Mine would read “MIT Graduate. Will Build Fancy Financial Models for Food.”)  Money comes in in the form of sales or income, it pumps through your operations and exits as expenses. The health of your business depends on money. Your capacity to work towards lofty goals depends on money.

To maintain the health of your business, you need to perform check-ups and run diagnostics. Does this sound intimidating? I have good news for you. You don’t have to do it. You don’t perform your own medical checkups and you don’t need to perform your own financial checkups. If you feel overwhelmed, you can stop making excuses and hire someone to do the heavy lifting on the financial analysis and then work with you to make the CFO-level decisions to maximize the impact of your business.  What you can’t do, if you want a healthy business, is let the accounting pile up and ignore the numbers altogether.

Excuses hinder impact. To make an impact you need to make a profit. To make a profit, your business needs a clean bill of health. To be healthy, you need a stellar accounting system and a solid financial policy in place. If you can’t be the CFO of your own business, bring one in. She will pay for herself in no time!

Money Myth 6
“Money can’t buy happiness,”
and other lies from Mommy, Daddy,
and our favorite preschool teacher

We are all familiar with the expression “money can’t buy happiness.” There is plenty of research showing that this just isn’t true...or at least that it's more complicated than that. See, for example, Kahneman and Deaton (2010)Clingingsmith (2015). Popular articles that summarize this topic include Yes, Money Does Buy Happiness: 6 Lessons from the Newest Research on Income and Well-Being by Derek Tompson and Money can buy happiness, but only to a point by Mark Fahey, and  Can Money Buy You Happiness? by Andrew Blackman.

I can address the research at a later date. For now, I want to reflect on my personal experience of the relationship between money and happiness. I grew up with the idea that money can’t buy happiness, but it is a concept that always caused me a certain amount of cognitive dissonance.  I tried to live by the pretty little idiom, but I think it ultimately ended up doing me more harm than good because it is simply misleading.

When I was eight, I was obsessed with the idea of making money because I saw that money was how people got what they wanted. And, lack of money f’ed everything up.  When adults asked me what I wanted to be when I grew up, I said I was going to be rich. In retrospect, this was not the answer people were looking for. It just sounds base. The enlightened 8-year-old should be dreaming about her career in science or engineering, right?

Children are taught that happiness is more important than money…or are they?  Mom and Dad and our favorite preschool teacher can say that money is irrelevant, but when our beloved grown-ups behave as though life will come to a screeching halt without it, it confuses the point.

My obsession with being rich was merely an absorption of the money-related anxiety that surrounded me. I was in the crossfire of a contentious divorce. Money (or lack thereof) was the root of all unhappiness.

My parents despised each other because of money scarcity. I saw my mother struggle immensely to raise three children while earning a part-time college education and tutoring for eight dollars and hour. I saw my father, a computer programmer and independent contractor, supporting two households while feeling taken for granted for his efforts.

It really took me decades to appreciate the depth and breadth of my parents’ efforts and sacrifices and the immense role that money played in our family. With a family of my own now, I am still learning.

If I were rich, I could avoid all the hassle and pain. I could be like my friends who seemed to have perfect families living in perfect homes with cute dogs and amazing toys. Sound familiar? Don’t we still do this as adults? There is a cliché for this, too – “the grass is always greener on the other side of the fence.” Yet, it is more than a cliché. This escapism is a destructive state of mind, clouded with perpetual yearning. The mind of Buddhism’s hungry ghost. It is an idea of perfection that doesn’t exist, and it takes us out of our own very real existence. By yearning for a reality that doesn’t truly exist, we fail to live in the present of our own lives, and to make an impact in our own lives. By chasing money because we think it is the key to happiness or the cure for unhappiness, we evade our own emotions and our own purpose.  This is why we are admonished as children to ignore money and seek our bliss instead, as if it is that easy.

At some point, I realized that what people really meant when they were asking me what I wanted to be when I grew up. They wanted the name of an occupation. Teacher. Firefighter. President. Simple. They wanted to know how I was going to contribute to the world. They weren’t concerned about my anxiety about money. Nobody wants to talk about money, though everyone obsesses over it. For a while, I started telling people that I would be a lawyer…because they make a lot of money…and because my grandmother said I was good at arguing my case.

About a year later, I was gifted a subscription to an environmental magazine for kids. I then began to understand the concept of impact. I began to understand what humans were doing to the planet and that there were things that I could do to mitigate that destruction. 

I went to a liberal university and majored in environmental studies and anthropology. I did a one-eighty. I committed myself to making a difference in the world and money was a mere afterthought. I was not going to run in the rat race. I was going to play by my own rules.  The problem was that nobody else was playing by my rules.  This is exhilarating and liberating on an intellectual and spiritual level, but it can be crippling on a financial level.

Now, I can safely say that I have spent most of my life steeped in anxiety about money, though I wouldn’t have admitted it.   This anxiety began as soon as I realized that it was something that people could argue over and go to court about. It continued as I tried in my various ways to make an impact, always swimming counter-current, and never concerning myself with becoming “wealthy” in the process.

I never wanted anyone to feel that I was using them for money, as my father felt. I never wanted to “sell out.” Instead, I lived my life wedged between a feeling of scarcity and guilty privilege, because I always had just enough to get by, which was more than most of the world.  This is the curse of people that open their eyes to the world’s problems and try to fix them. We constantly compare ourselves to the people less fortunate than we are.  It is impossible not to. The resulting guilt can sometimes cripple us to the point of hindering our own ability to continue doing the important work that we do.

I have only recently begun to truly realize that the emotions that we have about money are emotions that begin early. They are emotions that are shaped by our most profound experiences in life. Our past experiences with money – our experiences with scarcity or plenty – shape our attitudes toward risk, security, insecurity, belonging, fear, trust, responsibility, capability, allegiance, and so much more.

Like sex and death, money affects us profoundly.  And like sex and death it is scarcely talked about openly and truthfully. Try as we might, there is no escaping money.

What is True Impact?

Impact is not idealism. It’s not a vision in your head that never gets realized. It’s not a pot of money that funds your work. It is results in the real world.

Let’s explore the difference between daydreaming and doing. Daydreaming is images flashing on the inside of your brain. Daydreaming is synapses firing. Daydreaming is healthy debate in a college course. Daydreaming is your vision for how you will change the world. It is theory uncluttered by day-to-day reality.  Daydreaming is blissful in its innocence. Daydreaming propels us to take action because it promises simple resolution.

Doing, on the other hand, is messy and muddy. It is sometimes wretched but sometimes glorious. We do because we were lured in by the dream. We continue because we started. We finish because we don’t want to give up.  That is how we make an impact.

Making true impact is hard. It is grunt work. And it looks nothing like the college daydreams that lured you in in the first place. Daydreams are the crush – the fantasies about the girl in your chemistry class. Doing is marriage. It is staring at your husband on the ten-thousandth day while he still chews with his mouth open and loving him anyways, coming home to him and raising your children or whatever it is that you have vowed to do together. 

Making an impact is personal, physical, and emotional. It transcends job, career, academic degree. Your personal impact is the compromise that you find between the daydream and the doing. It is the pact that you make with yourself for how you will change the world before you leave it. It can be big or small. But it does have to be actionable.

What is your true impact? How do you move from daydream to doing?

Commit to Your Personal Impact

Decide on the impact that you want to make and commit to it. Tweet at me  @privatesidepub #dogood.

Start with one idea. One action. One result. Don’t worry if it seems small. Over time, the cumulative impact of multiple small actions can be immense. If we are too focused on becoming the next Martin Luther King Jr., we can become dissuaded or dis-empowered. We look at the grandeur of King’s impact on history and feel that nothing we can do would matter. But even King started small, taking over a struggling Baptist church in 1893 with only thirteen members. King worked with countless other civil rights activists who made small, cumulative, individual impacts of their own. You, like King, are a small part of a massive movement.

Once you have your one idea, your one action, and your one result that you want to achieve, stick with it. It’s so easy to be pulled in too many directions, to want to do too many things at once. But this dilutes the impact that you can make and increases that chance that you will never finish what we start. It means that you decide you are going to take a specific action and you follow it through until you achieve results without getting distracted by other shiny objects.

As I said previously, Doing is a marriage, not a crush. It’s a climbing Mount Everest, not the stairs to your house. It requires endurance and tenacity. If you want results, if you want to make an impact, you need stick to it until you achieve the outcomes that you committed to in the first place. This means no excuses and no whining. If you get lost in the woods, just find a different path to the top. Excuses are only a way to alleviate boredom or the discomfort that we feel during the doing phase. I know you want to skip from daydreaming to impact, but there are no shortcuts. Excuses may move you on to another project, but they will not yield an impactful life.

I don’t want to be a total Grim Reaper.  There is one get out of jail free card.  Committing does not mean that you can never change course. It is important to realize when a project is truly a dead-end and reroute when necessary.  Similarly, I wouldn’t advise you to stay with a spouse that beats you.  But as a general practice, try to prioritize commitment over abandonment.

What is True Profit?

Profit is not revenue. Profit is not a line on your P&L statement. Profit is the cash that you have left after you pay the cost of doing business.

In other words, profit is money in the bank*. (Yes, I know this is an oversimplification, but hear me out). If there is no money in the bank, and you don’t remember spending it on something awesome, profit never happened. You spent the money somewhere or did some creative or sloppy accounting.

Profit has two main purposes: 1) It sustains and grows your opportunities as a person. 2) It sustains and grows your business opportunities.

First, let’s look at number 1 - your personal life. What does your personal life look like without and with profitability?

Without personal profitability, you feel you are treading water, or worse, underwater. The money you are earning for your labor does not accommodate the lifestyle you are living or wish to live. You may feel your life is all work and no play. Or, you may be chasing your bills with credit cards or loans. In any case, you are not experiencing a profit, or benefit, from the labor that you exert.

When your life is profitable, on the other hand, your bills are paid and you can afford a few luxuries – vacations, bungee jumping, your kid’s college education, your beer brewing hobby, whatever.

Now let’s look at number 2 – your business, if you have one. An unprofitable business sucks time, resources, and joy from its owners. Symptoms of an unprofitable (or inefficient) business include:

  • Inability to pay taxes on time
  • Monthly juggling and struggling to pay bills
  • Inability to make payroll
  • Paying employees more than owners
  • Working way more than you want to
  • Any number of other cash flow problems

If people are willing to pay you for your products or services, why is it so hard to be profitable? Where does all the profit go?

A common formula for understanding the business bottom line is Revenue – Expenses = Profit. This is the way that most businesses approach profit. If there is no money after payroll, taxes, and operating expenses, there is no profit to be had.  Profit is an afterthought.

Yet, if profit is central to sustaining and growing your business, it must take a more prominent position. The Profit Firstmethod flips the equation to read Revenue – Profit = Expenses.

The Profit First equation and methodology forces you to be profitable. It forces money into the profit category. When you pay your expenses after you make a profit, you are forced to be more resourceful and efficient in the way you run your business.  That means that you have the breathing room to grow a sustainable business that can seek new and exciting opportunities.

The same goes for your personal life. The system forces you to have a profitable personal life. It forces you to set aside the resources to live a good life. And that, my friends, is the point of this rant. Running an efficient and productive business, and living a good life are the essence of profitability.

* Jonathan Levy’s “Accounting for Profit and the History of Capital,” details the history of profit and the various ways it has been articulated over time. Levy investigates the complex and changing relationship between profit and capital. I will address the historical progression of the concept of profit at a later date.  For this article, I am presenting a relatively simple definition of profit. This definition purposely excludes reinvestment in capital and instead focuses on cash distributions. In other words, profit equals the benefits accrued from doing business.