Transforming the Profit Equation: A Shift in Thinking

“Do not save what is left after spending, but spend what is left after saving.” – Warren Buffett

Have you ever considered the basic formula that dictates your business profits? Most entrepreneurs operate on the classic “Sales – Expenses = Profit” equation, waiting until all expenses are paid to see if there’s any profit left. But is there a different, potentially more effective way to think about it?

Let’s explore this by looking at a fictional café owner, we’ll call him Joe. Joe was running a popular café with great revenue numbers, but at the end of every month, he found himself with barely any profit. Expenses seemed to have a way of consuming every penny he earned. Then, Joe decided to invert his profit equation, choosing to subtract profit from sales before considering his expenses.

This means that every time Joe’s café made a sale, he immediately set aside a predetermined percentage for profit. The remaining funds were then allocated for business expenses. By doing this, Joe ensured that his business was profitable from each sale, and he adjusted his expenses accordingly.

This shift in thinking is profound yet simple. It transforms the way you perceive your business finances, making profit a priority rather than an afterthought. By rearranging the equation to “Sales – Profit = Expenses”, you can change the entire financial trajectory of your business.

Action Step: In the coming week, experiment with this new profit equation. From your next sale, take a predetermined percentage and set it aside as profit. Then, manage your expenses from the remaining amount.

Changing your approach to profit doesn’t mean you need to compromise the quality of your goods or services or cut corners. Instead, it encourages strategic thinking, careful budgeting, and innovative solutions to maintain profitability.

I hope this email motivates you to consider a fresh approach to profits. And if you’re intrigued to learn more about this concept, I recommend diving into the book “Profit First“.

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