Where did all the money go? I hear it all the time! My clients tell me – Justin: “Come in … and then” poof, he’s gone! “Poof, the magic master might catch you every time. You feel like you’re making decent money, but when you look at your winnings, the money is gone. Poof took it to the town of Kaputnicksville (Yiddish for the Land of the Lost – I loved that show!).
What you don’t know is that you are Pouf! AHA!
We have to find the money. So let’s get down to business and put on our thinking caps !!
Here are some key financial terms. Once you understand them, managing your money could be easier …
Sales = you already know! It is the amount of money you get for selling your products or services.
Cost of goods sold = the cost of producing the product, purchasing the materials, or paying for the labor to provide the service. Stay with me! I will give you an example below.
Gross profit = your sales minus the cost of goods sold. It is the amount of money you save before you have to pay to keep your business running (overhead).
Overhead = the expenses associated with maintaining your business. They are expenses (such as rent) that are NOT associated with a specific project or service that you are selling.
Net profit = How much money you make (and keep!) In your business. It is your income minus all your expenses. It’s the good thing!
Bottom line: Sales – Cost of Goods Sold = Gross Profit – Overhead = Net Profit
Here’s an example … Let’s say you’re Poof, the marketing consultant. You have a few clients and you also have a junior marketing consultant that you bring in when the going gets tough. He bills the junior executive $ 150 an hour and pays him $ 50 an hour.
Your sales are $ 50,000. The cost of goods sold is $ 20,000 (that’s the junior marketing type). His overhead is $ 20,000 (rent, phone bill, insurance and health care expenses, etc.). His net profit is $ 10,000. Where did all the money go? Poof took it!
Here are 2 places Poof could be taking your money:
1. Cost of Goods Sold = Are you paying your marketer too much money? An example of this would be if you bill the junior marketing guy $ 100 and pay him $ 75. Your gross profit isn’t high enough to pay the rest of your overhead.
2. Overhead = Is it costing you too much money to keep your business running? Do an analysis of all your overhead expenses. Think about the types of expenses you could eliminate: expenses that would not compromise your customer experience, quality of work, etc.
And here is a place where you can get more money. Increase your prices or make more in sales! If you can’t cut anything, then more new incremental sales could flow into the bottom line, as long as the cost of goods sold isn’t incredibly high.
There you go No more Poofmeister. Let’s save the money. Seriously. After all, it is yours.