Most small to mid-size businesses are barely profitable. Crazy but true. If that’s you, read 1-5. If you are totally rocking it, skip to #6
#1 Grasp the relationship between profit and impact
To understand the relationship between profit and impact it is important to understand the difference between profit and impact. Impact is the end goal. Profit – and financial health in general – are a means to an end.
Impact is the way you change the world around you. Impact is why you get up in the morning. Impact is purpose. Yet, it is very difficult to make a positive impact without resources. How can you be expected to make an impact in the world when you are struggling financially?
A business or career that is financially healthy and profitable has the resources to make positive impact. At the risk of being cliché I’m going to refer to Maslow’s hierarchy of needs, with physiological and safety concerns needing to be met before self-actualization can occur. Motivation to make an impact is a form of self-actualization. It is very difficult to make true impact if you are distracted by making your mortgage payment. I know. I have been there.
So, profit enables impact. But profit also enables a good life. Aside from impact, profit is the reason that you went into business or that you go to work every day. It’s ok to admit that you work for the money, or that you live for more than just work. Most people don’t live just to pay their bills. They want to have a little fun along the way. So, in non-monetary terms, profit is what benefits you. You do work that impacts the world in a positive way. You get compensated for that work, and that benefits your life. That is a fair trade.
It is important that your business, your career, your job, your life, benefit you. If the work that you do, day in and day out don’t benefit you, how will you find the motivation to make an impact?
Mike Michalowicz unabashedly lays it out the importance of profit, a.k.a. money, when he says,
Money is the foundation. Without enough money, we cannot take our message, our products, or our services to the world. Without enough money, we are slaves to the business we launched. I find this hilarious because, in a large part, we started our businesses because we wanted to be free.
Without enough money, we cannot fully realize our authentic selves. Money amplifies who we are. There isn’t a single ounce of doubt in my mind that there is something big you are intended to do on this planet. You wear the cape of what I believe is the greatest of all superheroes: The Entrepreneur. But your superhero powers can only yield as much power as your energy source provides. Money. You need money, superhero.
Read the book and dedicate yourself to making a profit. Here, I will give you the most important parts for free, just because I think it will help that much! Leverage your profit to maximize your impact. Taking care of yourself is the only way you can take care of others.
#2 Identify your money demons and get rid of your head junk
What are the stories that you have been told about money? In your family? Within your circles of friends? During the course of your education? All of these stories, phrases, and attitudes unconsciously frame your own money mindset – making it, faking it, losing it, not making enough, making too much, making more than your husband, making less than your wife, the list goes on.
Conjure up these phrases, attitudes, and fears about money and scrutinize them.
How do you think your friends would feel if you made significantly more money than them? Would they be supportive? Jealous? Envious? Resentful? What if you made significantly less than them?
What about your family? How do you feel when you tell your parents about your business or career? Do they judge your choices based on money-making potential? What emotions does it bring up for you? Does it affect your decision making?
What kind of conversations did your family have about money growing up? Could your parents “afford” what you needed or wanted? Did they fight about money? Was/is money a source of competition between you and your siblings? What are the idioms that floated around your house relating to money? “Money doesn’t grow on trees.” “You have to spend money to make money.” “Born with a silver spoon in one’s mouth.” What do these mean for you and how you manage your business and your life?
Take a hard look at the assumptions and attitudes that you have around money and where they are coming from. What are your money demons? Does this all sound a scarily Freudian? Like maybe our heads got all messed up by our parents…and maybe the education system…and we need years of therapy to fix it? Well, it should. Money is a powerful force and we can develop some serious head junk around it. Fixing that stuff is no joke. If you thought trying to commit to a long-term relationship was hard, try committing to a financial management system!
Get rid of your head junk. Make money. Make an impact.
#3 Don’t mix business and pleasure
This is accounting 101. I’m not saying don’t have an occasional drink with your colleagues. But if it’s a business date, pay for it out of your business account. If it’s Tinder date, pay for it out of your personal account. Oh wait, you don’t have separate accounts? Let’s back up. You are going to need separate bank accounts. If you already have separate accounts, skip to #3.
Ok, now it’s just us. No shame here if you have been paying for everything out of your personal bank account or credit card. Pretty much everyone does this until someone comes along and tells them to stop. It usually takes some nagging, because opening a new bank account is up there with rotating your tires. It’s just not the most exciting part of a new business. It is, however, extremely important.
There is no way to gain financial clarity if your personal and business finances are mingled. Intertwined accounts will also make any future advice that I try to give you very difficult to implement. So, if you are serious about running a business, open your account today. It will take no more than 30 minutes and will save you so much time and heartache.
Fair warning: there is one stumbling block when you open your account – you will need an EIN number. That is your tax ID number. If you have incorporated your business, you should have this number from the IRS. If you are a sole proprietor, this is your social security number. If this is all news to you, you will need to decide what type of legal entity to become (LLC, S-Corp, C-Corp, B-Corp…). You will need to file the right paperwork. The Small Business Administration is a great resource for figuring this out on a small budget (as most are at this stage). Or, if you want more certainty, you can seek out a business attorney in your state.
#4 Set up a solid accounting system and don’t let the pretty reporting software fool you
An accounting system is the foundation for your financial policy. The two work in concert to drive important decisions within your business. If you don’t already use accounting software like QuickBooks or Xero, get one, and for heaven’s sake, do it in the cloud…if possible.
Accounting technology is advancing at a rapid pace. Cloud accounting software is now able to automate many of the data-entry tasks that were once done manually. This is good news. It means that you no longer need to pay someone to enter data from your credit card statements into your general ledger. And, because this data is in the cloud, it’s possible to avoid the cost of hiring someone on-location and in-house.
A word of caution – all this newfangled accounting software makes it easy to think that it’s magically effortless. You set up your bank feeds, and voila, reports appear telling you how your business is doing. It is shamefully easy to mess this stuff up! Don’t let the pretty software fool you. Just because a plane is equipped with auto-pilot does not mean that you know how to fly it. Hire a professional or at the very minimum get the right training or support that you need.
There is a middle ground. Accounting can now be done virtually. Moreover, the time and resources that small businesses once had to spend on data entry can now be spent on higher level financial decision making. You can now have a virtual CFO, along with real-time data, for a fraction of what it used to cost to hire an in-house bookkeeper.
(This is, by the way, what we do at Viridian Analytics). This brings me to…
#5 Get help when you need It
If you are a scrappy start-up AND you know what the heck you are doing, you may be able to do your own accounting…for a while. This means you know how to reconcile all your accounts…correctly! This means you know what a P&L and a balance sheet are and how to use them to make sense of your business. This means you understand cash flow and can make projections in order to make operational decisions. This means you pay your bills, your taxes, and your employees (if you have them) on time. All of the time. This does not mean that all your decisions are based on your ability to use a credit card.
There are good reasons to do the finances yourself when you are starting out. Doing your own finances can be the best way to understand exactly what is happening with your cash. Training yourself in accounting principles will help you make better business decisions. The problem is that many business owners become quickly overwhelmed by either the workload or the complexity involved in the financial management of their business. I usually hear from start-ups 1-3 years into their business when they realize they are in over their heads.
You don’t need to do it alone. There is a whole profession of people out there who can help you. There is a reason that companies have both a CEO (chief executive officer) and a CFO (chief financial officer). These roles accommodate a division of labor in top-level decision making within a company. The CEO communicates the vision of the company, articulates goals, and decides on courses of action to move the company forward. The CFO manages financial planning and strategy. In a perfect world, the CEO and CFO work in concert to align organizational goals with financial policy. This is a cyclical process. Vision determines goals, which affect financial decision making. Conversely, finances enable or restrict potential courses of action toward goals.
If you are the founder and operator of your business, you are probably the CEO. You can undoubtedly benefit from a CFO. That doesn’t mean that you need to run out and find a business partner. Some firms (such as Viridian) have virtual CFO services on top of their accounting services. These firms are well equipped to work with you at a strategic level because they are intimately familiar with your business. It is also possible to add virtual CFO services to complement your own accounting team. These options are a cost-effective solution for small to mid-sized firms as they offer benefits of someone highly interested and involved in your business without having a C-suite level employee on payroll. Furthermore, if you work with a Virtual CFO that specializes in your industry, you will benefit from the knowledge they have gained across the sector.
#6 Read and implement Profit First
If you have been paying attention so far, you may have noticed I’m a fan of the Profit First method. I’m a fan because, in my experience, compelling financial analyses aren’t enough to change human behavior when it comes to money. Don’t get me wrong. I love using bad-ass analyses to back decision making. That’s what I do. But the truth is that most people make day-to-day decisions around money based on what is in their bank accounts. There is a good reason for this – it’s just not time effective to run a budget or a cash flow analysis every time you want to make a purchase.
Profit First is grandma’s envelope method. You allocate your income, twice a month, from an income account to four bank accounts: profit, operating expenses, owners pay, and taxes. You run your business based on the money you have in the bank, not the money you hope to have or wish you had or the money that the credit card companies have magically granted you. This is how you get out of debt. This is how you pay your bills on time, every time. This is how you pay your taxes on time, every time. And most importantly, this is how you pay yourself!
The system works. Use it. Start today. Set up your five accounts. Here is some stuff to get you going because I know this will work for you: Here is a quick video. Here are the five core chapters of the book.
I set up my five accounts in less than an hour. Just do it. If you aren’t ready to jump in the deep end of the pool, here is a simple start option. Set up one extra account – your Profit account. Allocate 1% of your revenue on the 10th and 25th of the month. It will get you in a rhythm as you read the book and get excited about full-fledged implementation.
Once you have fully implemented the Profit First method, and the system has matured, you will be taking home not only a regular salary, but you will be paying yourself quarterly profit distributions to be used for your benefit and enjoyment. Your expenses will be covered and your taxes will be up-to-date. You will have a rainy-day fund in case anything goes awry. Congratulations, you have learned how to take care of yourself and run a mature business.
If you implement Profit First yourself, awesome! I would love to hear your story! If you need professional help, book a free session with me and we can figure out how I can help you move forward.
#7 Set up an Impact Account
Now that you have a grown-up business with grown-up profit, you can put more thought and resources into increasing your impact. There are, of course, many ways to make an impact. But having financial resources makes any path easier. Need more time? Money can help by paying you or your employees to do good work. Need technical support? Money can help you hire the support or training that you need. Need materials? Money can help with that, too. You get my point.
Funding an impact account will allow you to systematically leverage your profitability to boost your impact. This is an advanced technique. Previously, I talked about why and how you must make a profit to make an impact. Don’t set up an impact fund until you have a healthy profit account. That’s like trying to add the roof before you build the walls. Oh, and don’t forget, your expenses and taxes should be paid, and you are paying yourself a fair income.
Having an account with a lofty name isn’t enough to make an impact. You need to have a plan for the money in that fund. The distinction between the concepts of “impact” and “purpose” is helpful at this stage. If we just pool money in a fund and decide that we can throw it at anything that is loosely associated with a given purpose, we are not necessarily making an impact.
So how do you transform purpose into impact? How do you channel the precious resources that you have pooled within your business towards tangible outcomes?
Remember when we talked about having a plan for your expenses so that you aren’t just paying them as they appear, with no attention to how necessary they are or how they serve your business? Having an intentional plan for your impact fund will channel the money in a deliberate and productive way rather than just letting it leak away.
Let’s walk through a simplified example for an urban design firm.
Impact Account Step 1: Understand context
Start with understanding the context in which you are trying to make an impact. What are the needs of the people (or environment) that you are trying to serve? This is the equivalent to knowing your audience when you give a speech. Just as you wouldn’t speak about high end handbags at a homeless shelter, you might not want to try out that two-million-dollar net zero home prototype next to a low-income housing project.
What are the interests of the people within your organization? There is no use in pursuing a goal that nobody wants or that the people in your organization have no interest in implementing.
- State program launched that provides matching grants for implementation of innovative technology for high-performing buildings.
- A large aging housing project near your firm is due for updates. City has applied for federal funding and plans to put out an RFP soon.
- The new city comprehensive plan identifies neighborhood districts and commits to approaching planning projects at the neighborhood scale.
Impact Account Step 2: Identify goals and objectives
A goal is what you ultimately want to accomplish - the impact that you ultimately want to make. Means objectives what you strive for to reach your fundamental goal. By clearly defining your goals, and articulating pathways to reach your goals, you are far more likely to make an impact.
- Minimize impact on environment
- Minimize cost of living in low socio-economic areas
- Increase organizational learning around net zero technology
Impact Account Step 3: Identify Actions and Make Them Happen
Actions move you from deliberating to doing.
- Pilot one net zero building every 3 years
- Partnership program with the city to develop a net zero neighborhood
- Multi-family housing renovation that incorporates innovative energy updates
Impact Account Step 4: Measure Outcomes
It is important to track progress and know whether your investments of time, money, and spirit are making the impact that you desire. Indicators should be tied to your goals.
- Net amount of energy used (or generated) in net zero neighborhood before and after program implementation
- Per capital energy expenditures in dollar amount before and after energy efficiency updates
- Number of new technologies implemented or designed (measure of knowledge gained)
The process that I have outlined above is a simplified version of the Structured Decision Making approach used in decision science (see for example Gregory et al). It is an iterative (circular) process that you can use repeatedly to align your actions to your purpose. The process also ensures that your actions matter – that they make an impact.
I hope I have convinced you that those who do good and those who make money should be one and the same. Money isn’t evil, it’s just something that we use to keep track of how much we work and how much we consume. We all need it because we all need food and security.
Not making money is not an option for most people.
How we make money, however, can be a choice. Do you just bring home a paycheck, or do you labor to make a positive difference in the world?
Whether we make enough money to sustain our impact can also be a choice. This one is trickier. This one can involve some self-imposed voodoo mind control and rewriting the myths that hold you back.
In case you forgot, here is a quick reminder of some money myths, and mind demons that can turn you into a righteous martyr instead of a live-action superhero:
1. Profit is evil
2. Rejecting capitalism will change the world
3. Altruism never requires compensation
4. You’re not good at math…
5. …therefore/or you’re not good at business
6. Money can’t buy happiness…
Tweet me more! @hiddenviridian @privatesidepub #myth
I gave you 7 steps to jumpstart your profitability and impact.
1. Grasp the relationship between profit and impact
2. Identify your money demons and get rid of your head junk
3. Don’t mix business and pleasure
4. Set up a solid accounting system and don’t let the pretty software fool you
5. Get help when you need it
6. Read and implement Profit First
7. Set up an impact account