Step 1: Review your financial dashboard.

• This step should be done monthly.
   
• You should have an answer to these three investor questions:
  • Are we making any money? If so, how much? Your income statement answers the question about profitability.
     
  • Do we have the cash to pay the bills for 90 days? Your cash flow statement answers this question.
     
  • Are we building wealth or just trying it? Your balance sheet answers this last question.
     
• If you don't know the answers to these questions, investors would assume that you don't know your numbers.
   
• These three statements are the foundation of your business and these help you in management decision-making.

Income Statement

• This basically shows the amount of your sales money.
   
• Sales and profit are two different things. What's left at the end of the day is your net income which is your profit.
   
• Have a bookkeeper in your team aside from your accountant.
  • A bookkeeper will track all your transactions that go in and out of your business.
     
  • A bookkeeper is also responsible for generating this report for you, so you don't have to know how to do it.
     
  • Having someone else do this task frees up your precious time.
     
• Do not let an accountant run your business. Instead, focus on their indications and make your decisions from that.
   
• Your income statement, cash flow statement, and balance statement make up your business financial dashboard.
   
• Knowing how to read them is like learning how to read a thermometer - it indicates a lot about how you'd go on for the day depending on the weather.
   
• For every dollar you bring in revenue, you should have at least 15% (15 cents) on your bottom line to have a viable business.
  • While 5%-10% still sounds profitable, your business will struggle when faced with hiccups along the way.
     
  • If you've uncovered that you're making below 15%, that is the time that you think of ways to fix that.
     
  • You don't have to do a lot and you may just do one or two minor shifts in your business to increase your profitability.

Cashflow Statement

• Do you have enough cash to pay the bills in the next 90 days?
  • Know your expenses within 90 days.
     
  • Know when your revenue will come in.
     
• Once you understand your cash flow statement, you can now look back on your previous cash flow statements to be able to predict the future.

Balance Sheet

• This sheet is particularly important to bankers and to investors.
  • These people want to know how much debt the business is carrying and how many assets the business has to cover that debt.
     
• Look through your balance sheet as if you were a banker or an investor.
  • When you do so, you can be aware of the risks that are present in your business.

Step 2: Focus on gross margin, not on revenues.

• Recognize that sales are not the most important thing in your business but it's gross margin.
   
• Gross margin is your gross profit.
  • It is what you get to run your business on.
     
  • It is the third line in your net income statement.
     
• The way you win as an entrepreneur is by optimizing gross margin, not increasing sales.
  • While gross margin and sales may sound like the same thing, these two are different.
     
• You deduct your cost of goods/cost of sales from your sales and what is left is your gross margin/gross profit which you use to keep your business on.
   
• How to improve gross margin with your existing customer base with the same level of services you offer?
  • Look at your pricing.

Step 3: Increase your gross margin by increasing your prices.

• Pricing doesn't happen in a vacuum.
   
• If your closure rate is at 40% (4 out of 10 new clients), you are charging too cheap.
   
• Charge premium for products/services that require your extra effort.
   
• Don't raise prices on everything.
  • Increase prices on the products that sell the most.
     
  • Test the market and see if you're overpricing.
     
• When your prices are too low, you trap yourself in running "IN" the business, and not "ON" it.
   
• Make sure that you are adequately compensated for all the time you put in your business.

Step 4: Increase your gross margin by eliminating unprofitable products and services.

• You could also shift the balance by spending less time on less profitable and enormously time-consuming products and services.
   
• You may resort to de-emphasizing these less profitable products and services.
   
• For creative people, your business should generate income so you can continue doing it.
   
• When you start eliminating those unprofitable products/services, it indicates that you're starting to get good at your small number of products/services.
  • By then, you can start to improve your systems, processes, efficiency.
     
  • You become better at solving very specific problems for better specific people that make you a better solution for your prospects and clients.
     
• Do not assume that more customers and more products/services will generate more profit. It is exactly the opposite.
  • Focus on your target audience.
     
  • Focus on what you do best.
     
• Interview 3-5 of your best customers and ask them why they chose your business over other options?
  • This will enlighten you on things you can focus on to increase profitability.
     
• Pricing cheap may appeal to investors that there is something wrong with your business.
   
• It's not what you're charging - it's what you're delivering, and that's where your pricing should be based on.

Step 5: Increasing growth margin by identifying profitability by the client.

• A client base is an investment portfolio.
  • Each client represents a cash flow stream.
     
• Do not assume that the client that invests big is the most profitable one.
  • Large clients who often generate large revenue, are often demanding as they have their own systems and processes, own cycle time, own accounting systems in place.
     
  • With this, you'll have to make adjustments to suit their systems.
     
  • Ask yourself if it's worth it to do business with them.
     
• There are two things to look at when dealing with your client base:
  • A third of your clients are at break-even. You're not generating any profits from them.
     
  • A third of your clients are underwater.  
     
• This means, if you're running an average business, a full two-thirds of your clients is actually costing you money.
   
• Look at profitability by the client.
   
• Look at the productivity of each sale per client.
   
• Nurture your relationships with clients that produce more gross margin.
   
• Let go of the clients that you don't profit from. Provide them with other choices they can consider in replacement of your business with them.
   
• A profitable customer can generate 25% to 85% more in bottom-line profitability.
  • The real profit and cash flow in any business lie in your existing client base, and not from new clients.
     
  • Your existing client base is your apostle. These people love and know your business.
     
  • These people have a huge network of people just like them and they can introduce you to their network.
     
• This also sends a message to your team members that your business is existing to be a profitable enterprise while enjoying working with clients that you love.

System Notes

• Look for a bookkeeper who is an expert in your industry.
   
• As you go over your financial dashboard, discuss with your bookkeeper on things you can improve your growth margin and cash flow.
   
• Create an action plan from that discussion.