Everyone wants to make a profit, but at the end of the month, quarter or year, it’s possible there’s little to take home even though you had record revenues. How does that happen and what can you do to ensure you take home the big prize?
In a recent CEO Stars session with several ad agency owners, it was discovered that some were putting profits back into the agency. When you do that, you’re just converting the profit into an expense.
Others were (thankfully & rightfully so) taking the profit ‘home’ in bonuses.
When I operated my ad agency, I took a minimum profit right off the top each month. I deserved it. Plus, not only did it guarantee me a profit, accumulating each month, I banked it in a separate account, hidden from the temptations of re-investing it back into the agency. The challenge though is budgeting properly so that you do make a profit. In order to do this, you’ve got to set a profit goal which can vary month to month or quarter to quarter.
How much profit do you want to make each month, or quarter? Does that question sound strange? Of course, it does because it’s not what we’re taught. We’re taught that income less expenses equals profit. Following that formula, you have little control over what your profit is going to be and sometimes it may not be anything. It happens when agencies get bigger, add more clients and the expenses that go with it, rise rapidly.
The rule of thumb has always been to subtract revenues from expenses and then hold your breath. However, what if it was the other way around where revenues less profit equals expenses?
Realizing this, one agency CEO said that for years, with adding new clients and revenues, and the expenses that go along with it, there was little profit left over – sometimes nothing at all.
To me, that doesn’t make sense; we’re in business to make a profit – and you’ll need that money when you retire.