This blog post is brought to you by Dr. Howard Polansky and Financially Led. In it, Dr. Polansky explains the impact of regularly auditing your business expenses to improve your practice's profitability.
As important as it is to raise your prices over time because your value and expertise continues to grow, it’s not the area that creates the greatest impact to your business. As Mike Michalowicz mentioned in his book, Profit First¸ he had a 7 figure business that was losing money. The average person would think to themselves how could that be? Because the top line has nothing to do with what’s left in the pocketbook. If the million dollars of revenue cost you $1,000,001, you are not running a profitable business.
An audit of your expenses, at a minimum, should be a required task every year. I know Profit First Professionals will help you with an audit of profitable/neutral/destructive expenses when a new client on boards. Why? Because they are guiding you into an Operating Expense budget your business needs to fit in. At the start, it almost feels like those pants you haven’t worn since you put on the COVID-15. It’s tight, you don’t know where to cut, but your PFP is your guide to realize what tools are a must have to your business vs a nice to have. However, there’s a deeper reason which most PFP’s may not even realize on why this should be done annually.
I credit Tim Francis of Profit Factory for making this concept simple to understand. Tim calls this the BLOAT of the business. Most people understand the concept of the profit margin of the business. If my business generates $100,000 of revenue and my expenses are $90,000, my profit is $10,000, or 10%. To generate an extra $2,500 of profit, I need to sell another $25,000 of goods and services. That may feel intimidating just thinking how much more you have to sell to barely create a bump in profit.
But have you stopped to think: If I can save $X from my expenses, how much less do I have to sell? This goes back to the BLOAT. If I can cut a one-time expense of $100 and my business has a profit of 10%, I won’t have to sell $1,000. If that $100 was a recurring monthly expense, I won’t have to sell $12,000!! It doesn’t sound real, but the math is the math. So let’s take this step by step.
I’m not here to judge on what you need to run your business. I’m here to help you truly analyze by the numbers how you justify each and every expense and understand how much in sales each expense really costs.
The added benefit of scrutinizing and justifying each expense is when you can cut an expense permanently, the profit margin of the business increases and the BLOAT decreases. Playing defense is how sports team wins championships and how you create a championship business.
About the Author: Dr. Howard Polansky practiced dentistry for 16 years for the US Navy and as an owner of a practice in Austin, Texas. A near death experience of his son had him wake up and see if there was a way to make a greater impact in this world. After sharing a photo of his $24 house payment with a colleague, he helped his colleague pay off his home in 8 months instead of 30 years. That started the journey of Howard rebranding into a CFO – a Cash Flow Optimizer.
Find out more at www.financiallyled.com.