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Where did all of the money go? I hear it all of the time! My clients tell me – Justin: “It comes in . . . and then “poof, it’s gone!” Poof, the magic meister could getcha every time. You feel like you are making decent money, but when you look at your profit, the money is gone. Poof took it to the city of Kaputnicksville (Yiddish for the Land of the Lost – I loved that show!).
What you don’t know is that you are Poof! Aha!
We gotta find the money. So let’s get to work and put on our thinking caps!!
Here are some key financial terms. Once you understand these, dealing with your money could be easier . . .
- Sales = you know that one! It’s just how much money you get for selling your products or services.
- Cost of Goods Sold = the cost to produce the product, buy the materials, or pay for labor to provide the service. Stay with me! I am going to give you an example below.
- Gross profit = your sales minus your cost of goods sold. It’s how much money you keep before you have to pay to keep your business up and running (overhead.)
- Overhead = the expenses associated in keeping your business going. It’s the expenses (like rent) that are NOT associated with a specific project or service that you are selling.
- Net Profit = How much money you make (and keep!) in your business! It’s your revenues minus all of your expenses. It’s the good stuff!!!
Bottom line: Sales – Cost of Goods Sold = Gross Profit – Overhead = Net Profit
Here’s an example . . . Let’s pretend that you are Poof the Marketing Consultant. You have some clients and you also have a junior marketing consultant that you bring in when things get busy. You bill out the junior exec at $150 an hour and you pay him $50 an hour.
Your sales are $50,000. Your cost of goods sold is $20,000 (that’s the junior marketing guy). Your overhead is $20,000 (rent, phone bill, insurance and healthcare expenses, etc.) Your net profit is $10,000. Where did all of the money go? Poof took it!
Here are 2 places where Poof could be taking your money:
1. Cost of goods sold = Are you paying your marketing guy too much money? An example of this would be if you bill the junior marketing guy at $100 and pay him $75. Your gross profit isn’t high enough to pay the rest of your overhead.
2. Overhead= Does it cost you too much money to keep your business up and running? Do an analysis of all your overhead expenses. Think about what types of expenses you could eliminate – expenses that wouldn’t compromise your clients experience, quality of work, etc.
And here’s a place where you can get more money. Raise your prices or do more in sales! If you can’t cut back on anything, then more new incremental sales could flow to the bottom line – as long as your cost of goods sold isn’t crazy high.
So there you go. No more Poofmeister. Let’s keep the money. Seriously. After all, it’s yours.
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