Why you need to focus on profits?
The thing about running a bookkeeping business is that we tend to often think like bookkeepers.
So when we consider growing our businesses, we focus on financial data, especially the potential for increasing revenue.
But what we really need to consider is profits.
If you change your goal from increasing revenue to increasing profits, you start to see your business decisions in a whole new light.
Let me put this in perspective.
There are many ways you could increase your revenue within your next quarter. For example, you could offer a special introductory price for an additional service for a trial period of three months, and many of your current clients would sign on.
Don’t be a wheel-spinner
But that wouldn’t necessarily make your company grow. At the end of that three-month period, when you had to increase the rate of the service to one that is sustainable, those trying it might reject it. If you decided to continue to offer the service even at an increased rate, you still might discover that the cost of providing the service was higher than anticipated, and it was cutting into your profit margins.
If you try to trade off your profit margin for revenue growth, you will be spinning your wheels for a while and think you are moving forward, but you will not be.
In reality, it is much harder, but much more important, to make more profit than more revenue.
For those bookkeepers who work from home offices, this equation is often not evident. We set our prices based on an hourly rate for our services that we generally pick as an indication of what we believe our time is worth. (I am using hourly rate in this example since that is still the norm for many in our industry – even though at our own firm we use flat fee and value pricing – not hourly)
Because we often aren’t paying rent for office space, we falsely assume we have no overhead to speak of, forgetting about our technology needs, our utilities, our supplies and our support services.
This is not a unique situation with bookkeepers. I have spent many years counselling small business owners from a variety of different businesses and they notoriously undercharge when they have home-based businesses.
They calculate their revenue and forget to factor in the full cost of creating that revenue.
But profit tells a different story. You only get a feel for your profit when you subtract you fixed costs from your revenue figure. It is always shocking to determine the big bite of your money your fixed costs take out of your revenue pie.
How do you grow profits?
If you are now convinced about the importance of profits, how do you set about increasing them?
You have to do several things. Some of them are easy and some are challenging, but all of them are possible and necessary for your long-term business strength.
The first you have already started to do, and that is change your mindset about profits. You need to see profits as the most important calculation each month, not just your revenue. Think bottom line – not top line.
The second is that you have to move more potential clients into your sales funnel. To do this you must have an accurate picture about how many people normally respond to your sales initiatives and become clients.
Find that figure by taking the number of customer leads you are currently working with in your sales funnel, and find the average number that normally proceed to the finish line and become clients.
To make the math easier, if you have four out of 10 potential clients become actual clients as a general rule, then your conversion rate is four out of 10, or 40 percent and that is good. But what if it is only one or none? You need to overhaul your program.
Next, calculate the money each client spends for every service they purchase from you and come up with the average per purchase. How many of those purchases do they make each year?
In your case, you may have clients who buy a package of your bookkeeping services at a set price each month for a year. So you need to know the expected total value of their business to you over the 12-month period.
Then estimate how much of what you make is profit, and how much is covering expenses, maintenance and other things.
If you want to increase your profit, you need to increase your results by the percentage point you require. You need more customers, they need to buy more services, and you need to make more profits.
It really is at once simple in theory, but difficult in reality. If you raise each of these three categories by 10 percent for example, the cumulative effect on your profits will be amazing.
One word of caution from our own experience – don’t try to correct everything all at one time. You will be more successful making the positive changes needed if you focus on one category per quarter.
Making the formula work for you
To make the formula work for you, begin by finding ways to put more customers into your sales funnel and convincing your current customers to buy more.
You need to gather some solid statistics about your business to formulate your plan.
For example, do you know an accurate count of how many leads your follow each year? How many of those leads or potential clients actually enter your sales funnel to start talking seriously about using your bookkeeping services?
How many end up actually signing a contract with you? What is that contract worth, on average?
How many services a year do they purchase from you.
What is the profit margin on each of these packages?
What would happen if you hiked up your results by 10 percent in each category (remember to multiply, not add, the results).
If you can see clear potential, go back to your thinking place and consider what additional services you could sell these clients that would increase your profit margins. Try to come up with five ideas.
Eliminate the weakest option, then the next weakest, etc., until you are left with one that has survived each cut.
Pursue that line of thinking and marketing as your logical growth plan.
Profit is not synonymous with greed
There is one final consideration when it comes to increasing your profits. Many modern socially conscious entrepreneurs worry that focusing on their profit is distasteful, that it is an expression of greed in a work world where what they really want to do is add value for their clients.
The two are not at loggerheads, even though I hear this discussion frequently.
The reality of business is that if you cannot make your business profitable, you will no longer be able to do the work of value for people and make their lives easier.
Worse still, you will diminish your own value and find yourself not making the most of the talent and skill you have that you have channeled into your business.
Bookkeeping by its nature requires a high degree of personal and corporate ethics and your value system is strong or your business would not survive.
But to keep it flourishing, you also need to create profit to sustain yourself, your business, your clients and your family. There is nothing greedy about that.
Do you agree or disagree? Your feedback is always welcome.
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We will be providing you with more information to help you Learn, Build and Manage your Firm in future posts, so stay tuned.
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