How do you keep score when it comes to the money that you generate in your business?
Well, I've been working as you know, with entrepreneurs for over 30 years now, and through that experience, I've basically determined that 99% of us, and I do mean US, tend to keep score incorrectly when it comes to money.
Now, I want to illustrate here, in the form of a story. When my son was growing up, we wanted to help him find his way to some sort of an athletic event that that he enjoyed. Some sort of a sport. And we cycled through every one of them, you can name. Now, upon reflection, I'll have to say quick sidebar here that I really think his primary motive was not so much to play the sports, but to get accumulate as many uniforms as he possibly could.
But that aside, I'll never forget when we landed on basketball. He loved basketball; he actually could dribble pretty well. I showed him how to shoot. You know, he had some great coaches and some teachers in basketball.
And so, the first game that we got to see him play, all of a sudden he got to get out onto the floor. Everybody was running up and down the court and he was of course following, dutifully trying to figure out what the heck was going on. And then all of a sudden, somebody threw the ball to him, and he sort of accidentally caught it. Well, he reflexively started to dribble, he took off streaking down the court, while literally everyone on the court stood there in in wonder and watching him dribble (all by himself) to the end of the court. He made a shot and made the basket and of course, his parents jumped up in great degree, great glee. We were so proud that he had made a basket until everybody around us started to chuckle just a bit. Well, it turned out that he shot a basket in the wrong goal. He made a basket for the opposing team.
You see, when we shoot at any basket, that
happens to be available, that's the same as keeping track or keeping score with
gross revenue in our business. It doesn't matter how much total money that you
make, what really matters is the money that you keep, or what we typically call
Now most entrepreneurs, and I've been there, I can tell you this, tend to fixate on the top line revenue, and very readily we spend all of it and then hurry up to go back out and find another deal to add to the top line revenue. And the reason that we are in that terrible cycle is because we're not keeping track of profit.
There are Five Buckets for Profit
Now here's what's more important, even more important than keeping track or keeping score profit, there has to be five places that profit goes.
The first place, of course, is taxes. We can't escape that. We’ve got put some money aside for taxes. It's a fairly easy number to calculate if you have trouble with that. Talk to a CPA or an accountant or even a fellow business person that does keep track of that. And you'll find out quickly,
The second thing, and this is super important and so many entrepreneurs neglect this. The second thing that comes out of profit after taxes is your salary, how much money that you're making, in order to live your lifestyle. And if you think it's heroic. If you think it's the way it’s supposed to be for you not to pay yourself, well, I'm just going to tell you flatly, you're wrong. If your business doesn't support your lifestyle, then you might as well just go get a job. Now, I don't know about you, but that sounds pretty nasty to me.
The third place that your profit needs to go to is contingency or security. That is a backup plan for if something goes wrong. Now, look, we all have peaks and valleys in business, don't we? And so we need to have a protection in our income and cash flow for that. And that needs to be put aside.
The next the fourth category that you should be putting money aside for is play… a reward. You see you're working your butt off, aren't you? You're working very, very hard to serve the marketplace in a particular way. They're glad to pay you. But if you never have fun, then again, I'll ask you this question, what’s the use? What's the point of you having a business? So your business needs to take care of your lifestyle, and it needs to take care of your fun.
And finally, the fifth bucket that you need to peel out of profit is your long term financial security. And so there needs to be a percentage of every single dollar that comes out in the form of profit that's set aside for that. And that might seem overwhelming at first, but if you go back and listen to this and jot down those five buckets and determine right now that you're going to keep track of profit, and not gross revenue, well, number one, I promise that the sense in the feeling that gratification and reward and that everything that you're putting in your business will amplify, will graduate dramatically. But also more important, you won't be shooting at the wrong basket.
Think about it. Make a new plan. Let's get profitable.