Old model:
Sales-expenses = profit
"Profit first" model:
Sales - profit = expenses
I don't know about you, but I don't really pick my business expenses all that much. "Hey boss, why is my paycheck half as much?" "Oh, sorry Alex, after taking out 30% of revenue for owner's pay, the percentage leftover for your payroll was a lot less, tough luck bud".
"Profit first" would really look like this as an example.
1. I want 15k a month. (That means 15 X 1.2 since 20% is tax = 18k a month income)
2. For my lawn care company, I add up all of the costs per crew. Let's say after labor+payroll taxes, gas, equipment, vehicle payment, and a split of other costs like software and rent, it adds up to close to 9k.
3. To hit my 18k income, how much do I need to bring in per crew?
1 crew: 9k costs + 18k profit = 27k revenue needed with one crew. Likely not going to happen. That's a pretty aggressive number.
2: 9k costs each = 18k + 18k profit = 36k revenue needed / 2 = 18k revenue needed per crew. More manageable.
3: 27k + 18k = 45k / 3 = 15k revenue needed per crew.
4: 13,500 revenue needed per crew
5: 12,600 revenue needed per crew.
See how the difference levels off and it makes more sense to squeeze some profitability out of each crew instead of adding new ones only? The difference here is just $900 per month. It would literally only be an extra 22.5 minutes of work per day for each crew and our profit from 4 crews would be the same as with 5.
This determines your prices, the amount of work that goes on the schedule. That's how I would really organize my numbers with a "profit first" mentality. That's what it really looks like to put profit first. You pick the number, do some math, and it tells you what you need to be hitting.
We assign a "time value" to what a customer is paying.
When we estimate, we assume every minute of our time including driving is worth $4 a minute. If your yard takes 20 minutes and 5 minutes of driving, we will charge you 4x25 = $100/mo for every other week services.
If we need one crew to bring in 15k/mo, we divide 15k by $4/min and get 3,750 minutes worth of work. If services are biweekly, that's 10 working days, so 375 minutes of driving+working for each crew would equal our 15k/mo goal. That's less than 6.5 hours of work a day.
Then, we track time on jobs and determine how profitable customers are. If their visits take 45 minutes (including driving) for biweekly services they should be paying 180/mo. If they aren't we would raise prices or get rid of them. We can organize customers by their profitability rate based on average visit time and adjust accordingly.
Profit first for us looks like setting a number, figuring out our variable costs, and picking the revenue we'd need for each crew in order to hit the numbers. I would never put the expenses at the end of that equation. I don't get to wave a wand and decide we will only spend $100/mo on gas, or pay employees $12/hr and expect anyone to stay working here next month.
Then, AFTER you've done this, then go ahead and setup an automated withdrawal system to send percentages of income into other accounts, so you don't spend money you should be using for other things.
Sales-expenses = profit
"Profit first" model:
Sales - profit = expenses
I don't know about you, but I don't really pick my business expenses all that much. "Hey boss, why is my paycheck half as much?" "Oh, sorry Alex, after taking out 30% of revenue for owner's pay, the percentage leftover for your payroll was a lot less, tough luck bud".
"Profit first" would really look like this as an example.
1. I want 15k a month. (That means 15 X 1.2 since 20% is tax = 18k a month income)
2. For my lawn care company, I add up all of the costs per crew. Let's say after labor+payroll taxes, gas, equipment, vehicle payment, and a split of other costs like software and rent, it adds up to close to 9k.
3. To hit my 18k income, how much do I need to bring in per crew?
1 crew: 9k costs + 18k profit = 27k revenue needed with one crew. Likely not going to happen. That's a pretty aggressive number.
2: 9k costs each = 18k + 18k profit = 36k revenue needed / 2 = 18k revenue needed per crew. More manageable.
3: 27k + 18k = 45k / 3 = 15k revenue needed per crew.
4: 13,500 revenue needed per crew
5: 12,600 revenue needed per crew.
See how the difference levels off and it makes more sense to squeeze some profitability out of each crew instead of adding new ones only? The difference here is just $900 per month. It would literally only be an extra 22.5 minutes of work per day for each crew and our profit from 4 crews would be the same as with 5.
This determines your prices, the amount of work that goes on the schedule. That's how I would really organize my numbers with a "profit first" mentality. That's what it really looks like to put profit first. You pick the number, do some math, and it tells you what you need to be hitting.
We assign a "time value" to what a customer is paying.
When we estimate, we assume every minute of our time including driving is worth $4 a minute. If your yard takes 20 minutes and 5 minutes of driving, we will charge you 4x25 = $100/mo for every other week services.
If we need one crew to bring in 15k/mo, we divide 15k by $4/min and get 3,750 minutes worth of work. If services are biweekly, that's 10 working days, so 375 minutes of driving+working for each crew would equal our 15k/mo goal. That's less than 6.5 hours of work a day.
Then, we track time on jobs and determine how profitable customers are. If their visits take 45 minutes (including driving) for biweekly services they should be paying 180/mo. If they aren't we would raise prices or get rid of them. We can organize customers by their profitability rate based on average visit time and adjust accordingly.
Profit first for us looks like setting a number, figuring out our variable costs, and picking the revenue we'd need for each crew in order to hit the numbers. I would never put the expenses at the end of that equation. I don't get to wave a wand and decide we will only spend $100/mo on gas, or pay employees $12/hr and expect anyone to stay working here next month.
Then, AFTER you've done this, then go ahead and setup an automated withdrawal system to send percentages of income into other accounts, so you don't spend money you should be using for other things.
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