There’s a difference between the price you sell at and how much you pay yourself … you knew that already (didn’t you?!)
Turnover is vanity, profit is sanity, cash flow is reality.
And then there’s gross profit and net profit; the difference between your sales, cost of sales and running costs. Not to mention all the other costs that need adding to your final end of year accounts, such as running an office from your home or depreciating assets.
OK … OK
Don’t let your eyes glaze over.
I don’t want this to be a bookkeeping lesson and, quite frankly, I am not at all equipped to be giving your tax and accountancy advice.
But one of the reasons why many clients come to work with me is because we talk True Profit.
It’s True Profit that I want to bring to your awareness today.
True Profit is much more than just figures on a spreadsheet. And as much as I would love to give you a simple formula to work from, everyone’s True Profit calculations will vary depending on your values, priorities in life and your personality.
Your True Profit is so much more than gross and net profit margins.
If you are running a service-based business, around your expertise, your day to day running costs are likely to be quite low. You don’t have retail space to rent, you probably don’t have a team of people you employ, there are no huge utility bills to be paid nor are you importing raw materials or paying distribution costs.
The running costs of your business are going to be your phone, internet, web hosting, advertising, marketing, home office, possibly travel and outsourcing such as a virtual assistant or web manager.
NOTE: If you really don’t know the exact running costs of your business, you need to get a handle on them right now. Especially look out for all those small monthly subscriptions to tech services you’ve got quietly running away from your Paypal account … they can add to hundreds every month if you’re not careful!
An important part of your expenditure is probably going to be around your cost of sales. And these are going to vary depending on your business model.
It’s these costs of sales where I want to start you on to help discover your True Profit.
Let’s take events.
If you run in-person events, your venue costs are going to be dependant on where you’ve decided to position yourself. The more expensive the ticket price, the bigger the budget you’ve to spend on your venue.
But if you’re staying cheap to keep the price of the tickets down, you could be penalising yourself in the long term. Let me explain.
Venue costs are directly proportional to the positioning of your event and thus what you charge for them.
Staying cheap and choosing a venue that only charges you £25 a head, there’s every chance you decide to charge a classic £95 per person. That’s 73% gross profit margin (before any marketing costs, etc).
Moving to a venue that charges £95 a head, the price for the same event wouldn’t only be increased by £70 … the value of the event has proportionally increased and there’s every chance you’d be able to charge £495 or more for the same day.
Not only has your total gross profit gone significantly up, but you are also up to 81% gross margin.
Taking this workshop example further, at a price tag of £495, you’d have to sell far fewer places to create far greater sales and profit.
It’s a mistake that many coaches, trainers and experts make when running training events, workshops and seminars. You believe that by setting a price at £95, this will make the event easier to sell. Thus you are forced to secure a cheaper venue to ensure you stay in profit.
And yes, I know … some will run these kinds of events as lead generation events; no profit made on the day but the profit is realised as you engage and build on that initial relationship. But let me put that strategy to one side for now, because to have a lead generation strategy like this needs to be seriously considered before you decide on your business model.
When you realise you will go through the exact same amount of effort to sell 1 place at £95 as you will 1 place at £495, it pays to pay more for your event venue to enable you to position your price better.
Plus, higher prices generally attract better quality clients. You only have to run 1 event with 40 people at £95 to realise far fewer people will step forward into other programmes with you compared to a room of just 10 paying £495.
OK … with this example, I’ve dealt predominantly with sales revenue and event costs here.
That’s just one small part of your personal True Profit formula.
True Profit also takes into account the following:
Health & Wellbeing
Some people thrive on launching and event promotion. I know I used to back when I was 10 years younger (I’ve been 12 years running my own business now). I used to love the hustle and the energy of promoting a live in-person event. The thrill of selling tickets and then running the day.
Today it’s a very different story for me. My energy levels are lower now being a “women-of-a-certain-age”. I’ll happily admit that the thought of standing in front of a room full of people all day exhausts me. I just can’t do it. Give me a day with my Academy members who I’m working intensively with over a course of a year … yippy de do. I’m a pig in muck.
But being presenter, trainer and speaker for a whole day … no way.
Thus the lead generation strategy that I mentioned earlier – sell lots of low priced tickets and then build and nurture those relationships to reap rewards during and after the event – is just not part of my business model.
Although it could be hugely profitable – and it is for many experts out there – it would affect my health and wellbeing and thus my True Profit would plummet.
There’s lot of different types of stress when you run your own business. There’s the stress of running around like a headless chicken with too much to do through to the stress that gnaws away at you slowly when you’re getting week after week after week of No’s.
Stress from not making enough money. Stress from believing you’re going to get found out one day … you’re not as good as you think you ought to be. Stress from having too many should-be’s cluttering up your to-do list. Stress from working with too many clients.
Many business owners, like you, take on work when you know you should be saying no. And many business owners create a business model based on what works for others … but just doesn’t work for them.
Stress of running live in-person events would be high for me and, of course, would affect my health and wellbeing. But for others, they love the excitement and the buzz – stress doesn’t even enter the arena.
What is not stressful for some, could be stressful for you. So make sure you take this into account when working out your True Profit.
Time with family and friends
Time is a critical part of your True Profit calculation.
Time is constantly ticking by hour by hour, day by day. It’s a resource that feels endless (there’s always tomorrow) but the reality is that it goes with a blink of your eye.
What you decide to do with your time is, of course, always up to you. And how you work time to yourself in and around your business is something you do have control over.
For me, my core objective when I first started working for myself was to create a term time business. My children back then were 3 and 5. I needed to be able to work only whilst they were in school or asleep in bed. It was the only way that my husband could carry on working full time, without the need for hiring live-in nannies or au pairs – something neither of us wanted.
It wasn’t all Easy Street straight off the bat. I was constantly frustrated by the short working days I had. It seemed I just got into the swing of doing some copywriting or arranging a couple of meetings, that I had to switch off and go pick up 1 or both of my kiddies.
But because my focus was Term Time Only, I worked hard at shaping my business model around school hours and terms. I am proud to say that I have maintained this term time approach in True Profit style 12 years on … and need it more than ever as my eldest embarks on her A Levels shortly and my youngest starts his GCSEs.
Time with family may not be your focus. You may have an elderly relative you need to care for. You may have a new love in your life that you want to spend leisurely long weekends with.
As I wrote at the start of this article, your True Profit will be different to everyone else’s. You need to clear on why time is important to you to give the motivation to go make a business to make it happen.
Holiday and days off
This follows on from time with family and friends, but I like to keep this separate because planning and booking holidays often needs long-term thinking to make happen. A member of my Academy realised last year that, although holidays were incredibly important to her, she always found herself too busy to book any because she was a self-confessed workaholic. She loved what she did, so she allowed herself to keep going month after month before getting to the end of the year and realising she hadn’t gone away.
This year, she started the year by booking holiday dates in her work diary first … and then went about creating her business strategy and plans around them.
Now that’s True Profit.
Education and personal development
Another problem I see happen is business owners “forgetting” to allow time for personal development and education. If you were an employee as an HR or accountant or legal professional, you’d probably be obliged to complete your CPD (Continual Professional Development) hours.
But work for yourself and where does this obligation come from? When you have no clients, you worry about taking time out to learn because it’s not bringing in leads. But when you get busy, how do you make the time to take out from client paid work?
Scheduling in and making education and personal development is critical if you want to keep your business growing because if you aren’t growing, stagnating is a dangerous place to find yourself.
A business model that allows this, will give you the True Profit that you need to make this happen.
Resources and hiring of a team
This is an interesting part of the True Profit equation. Hiring a team is often a critical part of ensuring your business is not ALL about you. You can’t be the expert, web designer, customer services manager AND the tea maker. At some point, you will need to hire to ensure your True Profit is realised.
Starting small with an assistant who may help manage your diary appointments and answer your phone is a good place to begin. Over time, as you learn to delegate, you will outsource more of the doing of your business; graphics, content creation, bookkeeping right through to online business managers and possibly salespeople.
However, there is a tipping point that hiring a team eats into your True Profit. A very good friend of mine found herself celebrating a 6 figure plus business. From the outside, her business was a huge success and she was recognised as one of the leading experts in her field. But pull back the curtains and there was an 8 person team working away costing her thousands of pounds every month. Her turnover was high but what she was paying herself was minimal.
Her True Profit was almost non-existent.
So hiring people works in principle but only if your business model ensures you get your True Profit.
What else have I missed?
There will be other parts of the True Profit equation that will be important to you. Perhaps it’s having one of your children come work in your business. Perhaps charitable contributions rate highly in your values.
I’d love to know what else you value and how it affects your True Profit calculation.
Want to discuss your True Profit potential with me?
There only a limited number of these available each month so if you don’t see any times on my calendar when you click through, email my assistant Alexia at Alexia@KarenSkidmore.com and ask to be put on this month’s waiting list in case we get a cancellation.