More Profits Equal More Money in Your Pocket!
Episode 142 – The Local Small Business Coach Podcast
Here is what we discuss in today's episode:
[Make More Money Series] – Creating the Profits Needed to Increase Your Average Hourly Income:
In our last part of the series, we concentrated on driving new sales to increase your hourly income, here in part 3 of our five-part series, I want to dive into the role of profits and how they dictate how much income you will make each hour. Now this one might seem like a no-brainer since your profits are what drive your take-home pay.
And you would be correct, however, keep in mind profits also include money that you're going to spend on taxes, your retained earnings, expenses and product costs, so you need to be able to make enough profit to cover those items as well.
I want you to concentrate on two things. Maximizing the profit from the sales you will be generating, and revisiting all your expenses, costs, & process to make sure you plug up any leaks in profits that you are having.
KNOWING YOUR NUMBERS
You must know your numbers. This doesn’t mean you need to memorize them. But you need to have access to them. Not just your sales, but you need to know where your money is going and how much your products and services cost you.
How can you fix something if you don’t even know what you are fixing and where your money is going? You create a home budget to make sure you spend your money wisely, so you want to make sure you are spending your business money wisely as well.
This includes having a spreadsheet on your product costs. For each sale you have, you should know how much is going back out in products costs.
The first thing off the top of your sales are the product costs associated with what you sell. So you are going to want to make sure you aren’t leaving money on the table.
Earlier I mentioned the spreadsheet. It is a good habit to look for items that you can work to reduce what you are purchasing them for. Can you get a better vendor with a better price? Are you priced right? For example, if something costs you $4.99 and you sell it for $5.99 you want to see if you can purchase for $4.50 or if you might be able to sell for $6.50.
Big box retailers are always looking for ways to reduce their costs. Sometimes they can do it by buying their top sellers in bulk and sometimes they do it through longer-term commitments to the vendor. Sometimes they must leave a long-term vendor and switch to someone with better terms. Time to look at your vendors and if some changes can be made.
I also want you to think like a business. They know that little things add up. For example, well ran fast food places save money by teaching their teams to not hand stacks of napkins to people and watching the number of hot sauces or dips that go out vs handfuls. While this can be irritating when you want more, there is a difference between smart spending and being cheap.
Another great example is how one of the airlines took off one olive off the first class salads and saved $40,000 and other one sliced the limes into more pieces and saved half a million! Do not underestimate how little things add up over time.
Word of caution, do not go cheap, do not sacrifice quality for profits, because it will bite you in the butt later when you start to lose customers or when word of mouth gets out that you're doing using inferior products.
So dive into the product costs. Remember, for every dime you save, it will go to your bottom line, and that means, the majority of it will go in your pocket!
Expenses are similar to product costs. You will want to dive in and start finding money. Remember expenses are either fixed or adjustable often called controllable or non-controllable. Fixed expenses tend to remain the same regardless of the amount you do in sales. For example, your insurance is a fixed cost. That doesn’t mean you can’t try and get better costs but the nice thing is, they typically don’t cost you more money as your sales increase.
Adjustable costs tend to fluctuate with your sales. For example, if you travel and have a high gas expense, the more business and the more travel you do, the higher this will go up.
The biggest controllable expense you have is payroll. Whether you are hiring temporary folks off the street to act as independent contractors or “helping hands” or you have a full fledge payroll. This line item on your profit and loss is huge.
Now, I’m not telling you to stop paying people, I’m telling you to make sure you are getting your value out of what you are paying them. Pay them $50 an hour, but make sure you get $50 an hour out of them. Where business owners make a mistake is, they accept people working 70% to expectation and then compound the problem by hiring extra people to compensate for the deficiency.
Dive into each expense and ask yourself if you need it or can you reduce it? Once again, the majority of the savings will be passed along to your hourly income.
One other area that impacts your profits is your inventory. Whether you have inventory sitting on shelves in your store or the shelves in your garage, you need to remember that inventory is money. Now, if you are turning that inventory, no problem, but if you have more than a few week of inventory, then you risk having money just wasting away.
It is time to dive into your inventory and find money just sitting there. Create a plan to sell off or exchange that product. Be creating. Keep in mind, that if you were to reduce your inventory by say $5,000, this will equate to a bump of $1.67 in your average income. ($5,000 divided by 3,000 hours a year).
CREATE MORE PROFITS VIA ADD-ON ITEMS
In our sales part of the series, we discussed how you can increase your sales via add-on items. One of the best parts of most add-on items are the profit margins they have.
Think about the candy and sodas most places sell at the front of their stores, these have tremendous margins. Warranties are almost all profit which is a great win/win for both sales & profits.
If you think about the items you could add on to your products or services, I bet you notice they tend to have a nice margin to them. So make sure that you are really focusing on this great option to create profits.
Let’s just say you find a way to earn $10,000 in extra sales through add-on items, and these items have an average of 70% margin to them. That is the potential for $7,000 in profit. Assuming you keep most of it, that bumps your average income another $2!
PROFITS IN YOUR POCKET
As you can see, the more profit you can create, the more you can boost your average income. Think about it, let’s say you have a service based business and you find a way to create an additional $1 in profit for each job. Assuming you do 30 jobs a week and 52 weeks a year, you created an additional $1560 in profits which just bumped your average income 52 cents.
When you pile on top the money you save by watching your inventory, reducing your product costs and lowering your expenses, you can start to see that wage growing and growing!
Remember if you can squeeze an extra $10,000 out of profits, even without increasing your sales, you are going to jump your average wage. Let's say you currently make $50,000 and you add that $10,000 you just squeezed out, you now are sitting at $60,000. Assuming you still work that same 60 hours you just jumped from $16.67 an hour to $20 an hour!
Pile on some new sales and the profits they come with, and the sky is the limit!
In the 4th part of the series, we will come up with even more profits that you are bleeding off in your broken processes! So, don’t forget to check out the other parts of the series as well.
Here are the links to the five parts of the series. You don't have to do them in a specific order, but I do highly recommend that you do all five.
Time to start making more money!
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Don’t forget, if you are looking to take your local small business to $100,000 in profit, head on over to LocalSmallBusinessCoach.com/8steps to download the free ebook & workbook called: 8 Steps Local Small Business Owners Need to Take to Make $100,000 in Profit. Where I’ll walk you through how to double or triple your current profit level.
Also, don’t forget to shoot me an email on any topic or question you would love for me to cover in an upcoming episode of the show. Just send your ideas to email@example.com.
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My Recommended Bookkeeping Program for Local Small Business Owners: Freshbooks Link
Why? Helps you invoice quicker and more importantly, get paid quicker. Let’s you know when your clients have opened the email and they even help send reminders. Clients / customers can pay right from their phone or computer. Give it a Try: Freshbooks
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Two Great Books to Help You With Your Small Business:
Highly Recommend all Local Small Business Owners Read the eMyth by Micheal Gerber. You will learn some critical things about running your business.
The second book is one I wrote based off a popular example I always use when folks are trying to understand their role as a leader with their people. Check it out.
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