Controlling spending is a key principle of Profit First. Usually that is easy with most expenses. Working through your Instant Profit Assessment and your Quarterly Improvement Plan, you can remove unnecessary expenses. Ideally you would reduce your operating expenses to the “bare bones” to operate the business. If you don’t need it, get rid of it.
The confusion, and trouble, comes when you have an expense that is not necessary. I categorize these into two buckets: discretionary and investments. Discretionary are those that aren’t necessary, but are convenient. An example would be paying a virtual assistant to manage your email. You don’t HAVE to spend that money, but it might be something that you like/want.
The key here is understanding that discretionary expenses are coming out of your profit. If you are comfortable with that, proceed. There is nothing wrong with spending profit to give you back some of your time. But I think it is important to remove all of the discretionary expenses when you first start Profit First so that you can have a good base line to work from.
Investments are expenses that you THINK will bring in more revenue in the future, but you are unsure. Examples would include:
- Employees
- Software
- Marketing
So how do you handle those in the Profit First method? First, understand that these amounts are also coming from profit. The difference between and investment and discretionary expenses is that you intend to make more profit from those expenses in the future.
I discuss this in the book, with examples, in Chapter 6 Common Problems and Solutions. When you are making an investment expenditure, you need to be uber clear on how that will make you future profits. You may be wrong in your assumptions, but make sure that you are doing the work of critical thinking. One tool that I have found useful to make these decisions is the Decision Filter developed by Cameron Herold.
This worksheet forces you to clearly define the reason you are spending the money, and walk through the impact on your business. It also requires you to determine the costs in terms of time and money and estimate your return on investment.
About The Author
