Today we're talking about the second level in the Business Hierarchy of Needs - Profit! You guys know that's my jam. If you haven't taken the evaluation yet, do that today so you can concentrate on the vital need in your business.
Our ecommerce clients who have completed the Fix This Next assessment have typically found the first 3 levels to be where they have a core need. Last week, we discussed the Sales Level, where the focus is generating cash. Today we will talk about the Profit Level, focusing on the creation of stability.
Breaking Down the Core Needs for the Profit Level
Let's take a look at the 5 core needs for the Profit Level:
- Debt Eradication
- Margin Health
- Transaction Frequency
- Profitable Leverage
- Cash Reserves
Debt Eradication – This is critical for small ecommerce businesses. From my experience, there is not enough margin to both grow the business and pay interest. While the initial idea to use credit was in fact to speed up growth, I often see the opposite effect. The borrowed funds do not produce the expected return and interest expense uses up the cash. Debt left unaddressed can become an anchor and add to your stress. There are healthy ways to use debt and we'll address that in Profitable Leverage below. To understand your position around debt, are you consistently removing debt rather than accumulating it? The equation is simple, if you are in this position you must either increase margins or reduce costs. Adding more debt will not solve the problem unless you address either margins, costs and probably both.
Margin Health - Do you have healthy profit margins on your products? Are you continually looking for ways to improve them?
We work with our Progress Masters clients to evaluate their margin health. We start by using the 80/20 rule. We examine the profitability of the top 20% of the products both by sales dollars and sales volume. We learn what can be improved and we work on that. Next, we look at the bottom 20% of products by sales dollars and volume. Many times, these are legacy products that clients are emotionally attached to. This is where an unbiased third party can help you be objective in your analysis and decision making.
Transaction Frequency - Do your customers repeatedly buy from you over alternatives? While this seems like it belongs in the Sales Level, it really speaks to the cost of acquiring customers. If every sale requires your full marketing effort, then you better have great margins. You want to create leverage from each new customer and better yet, figure out how to turn them into raving fans. This speaks more to creating stability—the profit level.
Profitable Leverage - When you use debt, is it used to create predictable profitability? To quote Mike Michalowicz, author of Fix This Next, "Debt can be a valuable tool when it is used to amplify clear profit opportunities." All too often, I see debt being used as a lifeline, especially now with the SBA loans available from the pandemic. If you are using debt to fund operations or inventory, then you are likely in the situation of using debt in an unhealthy way. When our clients are using debt, typically it's because of issues at the gross margin level or operating expenses being out of control. Many times, operating expenses are out of control because interest on the debt is such a large percentage of the expenses. This problem can be solved with Profit First if the business owner is willing to make the tough decisions needed.
Cash Reserves - Does your business have enough reserves to cover three months of all expenses? I also recommend having enough owner pay to cover six months of your family budget. You see, as a business owner, the personal paycheck is dependent on the business continuation. When you have cash, you have time. You have time to think and examine the data for all your alternatives and make the best decisions. You have time to wait out the initial shock and crisis and see where the true trends are developing. And the best part of having time is that you don't have to experience panic. While we're dealing with the unprecedented pandemic conditions now, there will always be hiccups in your business. There will be lost inventory or suspended accounts, or supply chain issues. Having a cash reserve makes those situations, hiccups and not catastrophes.
Building Cash Reserves
If you have debt, it can be hard to build cash reserves, but it's not impossible. Oftentimes, we start with margin health and as that improves, we can work on reducing the debt while simultaneously working on building a cash reserve. This sets us up to implement Profit First, and that cash methodology keeps our spending in check while rewarding us as business owners.
If your Fix This Next assessment identified profit as your vital need, we would love to help you resolve this issue. Start with my book, Profit First for Ecommerce Sellers or reach out today to connect with a profit advisor.
If your ecommerce business isn’t where you’d like it to be in terms of profitability, check out my book, Profit First for Ecommerce Sellers. It answers important questions about how to implement Profit First in an ecommerce business. Take control of your money and your business, and put Profit First to work for you!
You can also sign up for the Profit First for Ecommerce Sellers Online Course. As a Mastery Level, Certified Profit First Professional, I will teach you why Profit First works so well for ecommerce businesses and the particular challenges for businesses that have physical products requiring inventory management. You will learn how your behavior drives your money management habits for your business and how you can set up your business bank accounts to work with your habits.