I’m reviewing budgets with clients right now, and I see one mistake over and over again. It’s a basic math error, but it’s hitting owners right in the wallet!
Most of us were taught that Profit = Sales – Expenses.
That’s wrong. Or at least it leads to wrong thinking! Let me explain.
When new business gets harder to find, and our current clients are tightening their belts, our sales pipeline might start to look pretty skinny. So if we’re using the equation above for profits, our income will drop, maybe to zero!
You can have profit at any level of sales.
The profit you make is not dependent on your sales level. You can make a profit at any sales level that exceeds your salary! You just have to cut expenses.
If you change the formula to be: Expenses = Sales – Profit.
You decide your profit before you start the year. Then you adjust your expenses to yield that profit given your sales forecast.
But, I can’t cut that
Now there may be expenses you don’t want to cut, but that’s a decision you are making to spend your money on those things. That’s your profit that you are spending to avoid making the hard decision to cut costs.
You can decide today. How much do you want to make next year?