Budget for Profit
How does the average solo and small firm partner think about the profit their firm produces each year? In very simple terms, their mental equation probably looks something like this: Revenue – Expenses = Profit This is the traditional and very rational view of how profit is produced. And the traditional result is that profit is incidental. Basically, what’s surplus after the bills are paid. But, according to the book Profit First: A Simple System to Transform Any Business from a Cash-Eating Monster to a Money-Making Machine by former Wall Street Journal columnist Mike Machalowicz, the right equation should look something like this: Revenue – Profit = Expenses This new approach turns the traditional "profit is what’s leftover after overhead and expenses are paid" method on its head. According to Machalowicz, a much more proactive approach is needed to guarantee that a profit will be there at the end of the year. He advocates that when revenues come in a portion is immediately set aside for profit and the rest covers overhead and expenses. To do this successfully means profit is budgeted for in advance. How is that done? We believe you do this by looking at the last several years of gross revenues and profit percentages to...
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