Like every woman I’ve ever met, I wear a lot of hats and it’s not always easy to swap one out for the other.
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5 Big Mistakes Women Make When Launching Their Online Fashion or Lifestyle Store
(AND HOW TO AVOID THEM!)
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“What if, rather then you serving your business, your business served you” – Mike Michalowicz
Did you know that most online businesses use an age-old accounting method that actually results in us paying ourselves last and generating a profit rarely?
We operate from a completely flawed model and sadly, many business owners consider this to be the only way…Sell your products, pay all your bills and expenses, then if there is anything left, pay yourself and lastly, the remaining money can be considered profit. Exhausting!
But what if I told you, this method, was completely backwards?
I recently came across the book “Profit First” by Mike Michalowicz and I will be the first to put my hand up and admit that the accounting method Mike flags as being our biggest mistake, is a mistake I have made.
“The cash eating monster” is something many business owners are familiar with. The expenses keep coming, the idea of profit continues to seem further and further away. It doesn’t have to be this way!
Thanks to some of the powerful tips in Mike’s book, you can have your business generating a profit immediately PLUS making sure your business is one of the businesses that succeed.
So how do you know if you are making money mistakes in your business? Let’s explore each one.
The above formula is how most people run a budget in their business and lives. Based on the traditional GAAP principles, Revenue – Expenses = Profit. However, Mike reverses this formula suggesting that we need to pay profit FIRST!
What if you managed your budget with Revenue – Profit = Expenses?
What if, instead of paying yourself last, you actually paid yourself first AND you managed your expenses within the remaining funds?
Start with determining how much profit you are going to set aside each month/ week/quarter, this will then determine how much money you have left to cover the expenses in your business.
Which takes me straight to mistake #2.
How many times a day do you check your bank balance?
How often do you make decisions based on that bank balance?
Rest assured you are not alone.
This is a common pitfall for small business owners. We think that just because there is money in our bank account today, or this month, that now is the time to raise the bar and buy more software, lease or purchase more technology, and why not a bigger office? New car? Sure!
However, what you have successfully done is raise the cost of running your business to a new high.
But what if you have a bad month? Do you have the reserves available to cover it?
Bank balance accounting for your business is a slippery slope downhill.
What Mike suggests in his book, is once you have paid your profit FIRST, you then need to make your business expenses affordable with the remaining funds.
Why does this work?
Mike uses a great toothpaste analogy which I will briefly summarise.
Have you noticed when you buy a fresh tube of toothpaste, that the first few times you go to use it, you spread toothpaste in a thick clump from the top of the bristles to the bottom without giving it a moments thought? You have a full tube – so let’s go all in on the toothpaste!
Have you also noticed, however, that when that tube of toothpaste is running very very low, that you can get by just fine with barely a smidge of paste on your toothbrush? You will squeeze that tube, roll it up, flatted then top – anything to get the last little bit of paste from that tube and whatever comes out, is perfectly acceptable. In fact, you may even feel triumphant knowing you withheld buying a new tube for another day.
Managing your business expenses after you have paid your Profit first, is based on the same principle. If you know that you have XX dollars remaining, after profit, to cover your expenses, you will be amazed at how thrifty you can actually be when the need arises.
If we use the toothpaste analogy again – and this is just my take on Mike’s theory – would you still try and squeeze the last little bit of toothpaste out of the tube, if you had a bucket of full tubes within eyesight?
Ah – no would be the answer!
You would probably bin the tube the moment it started to feel a little too challenging, and reach for a new tube and start the process all over again.
The same applies for when you keep all your funds in a single bank account.
Now you might think you have the self-control or a ninja and resisting funds that have been allocated elsewhere is something you will just master – if that is you, kudos, but you are in the minority.
Most business owners, myself included, find it too difficult to stare at a bank balance and mentally deduct all the expenses in a moment, or heck even remember them, to determine if what is remaining is accessible.
Most business owners will see that balance and assume it’s all available diving straight back into Mistake #2.
Stop making it difficult. Move the funds out of your account and leave ONLY the funds after you have paid your PROFIT First.
Want to learn more about Mike’s “Profit First” Concept? Check out Mike’s book here.
Have you read Mikes book? Did you apply the principles? I’d love to hear from you!
Comment below or contact me.