If you were taught like most, you see profit as what’s “leftover” after expenses — a surprise number that you pray is positive and try to ignore if it’s not. But I want to teach you to be PROACTIVE with your profits, planning ahead to ensure you have them so you can stop operating on wishful thinking.
This is Part 2 of 3 in the CFO Habits Series!
What is a Business Profit Plan?
I believe creating a business profit plan involves three main components.
Part 1: A Profit Allocation Plan
Revenue minus expenses equals profit, right? Sure, according to the math. But if you want to cultivate a new behavior for profitability, one that allows you to sit in the driver’s seat again, then I’m going to encourage you to think of it this way:
Revenue - Profit = Expenses
The difference is that we’re going to set aside our priority items FIRST before we allow that money to go towards our business expenses.
The question of “How much should I reinvest back into my business to cover costs?” is now answered by “However much you have left over after you’ve reserved what’s most important.”
If you’ve never heard of the Profit First method for business money management, pause here and read this post! Then I’ll show you how to create your allocation plan later in this post.
Part 2: A Revenue Plan
Knowing what you’re going to do with the revenue you earn is one thing, but do you know how you’re going to earn your revenue? Do you know what you already have coming in? Do you know how much more you have to earn to reach your goal? Do you even know what your goal is?
Mapping your way to your revenue goal is a critical step in guiding your business decisions. Your revenue plan influences what offers you create, which offers to launch, how you need to price your offers and more.
Part 3: A Spending Plan
The third component is a plan for how you're going to spend your money. We talked about leaving your “leftovers” as your spending budget - but that means you need to be intentional to ensure you’re spending within that budget. For some people, simply knowing how much they’re allowed to spend each month is enough. But for most of us, we need a more detailed spending plan.
Click here to read How to Budget for Business: A New Approach That Actually Works (+ Profits)
For the rest of this current post, we'll focus on Parts 1 and 2 of the Business Profit Plan.
How to Plan for Profit
Let’s revisit Part 1 of the 3 components of a business profit plan: Your Profit Allocation.
What I mean by this is that whenever your business earns money — revenue — you should plan to allocate a percentage of it to profit.
That said, profit itself serves three functions: to pay you, to pay your taxes, and to act as a cash reserve for your business.
So in reality, what we want to do is divide up our revenue into three main buckets, with the leftover going towards expenses. The easiest way to do that is to set a percentage rule for each purpose!
Here’s an example of a Profit Allocation in action:
Personally, I also like to use this specifically for money that I KNOW is coming in, not sales that I hope to get. It’s up to you how you’d like to map this out, as long as you’re realistic and honest with yourself!
When you can accurately map out your expected cash inflows, it’ll help you to proactively identify any upcoming revenue gaps or where you may fall short of your goal.
Then, you can plan ahead for how to reach that revenue goal.
Hint: The CFO Starter Kit also contains a calculator for this as well! 😉
How Often Should You Do This?
As the CEO of a business that needs to continue making a profit, sitting down to intentionally develop a Profit Plan should be a regular part of your routine and systems.
On a weekly (recommended) or monthly basis, you should be mapping out your anticipated revenues and checking on your progress towards your goal so that you can stay in the driver’s seat (instead of finding out after the fact that you came up short).
Then, on a monthly or quarterly (recommended) basis, you should be re-evaluating your percentage allocations for how you divide up your revenue earnings into your savings, salary, taxes, and expense buckets. Over time, you should be able to incrementally shift your way closer to your ideal percentages as you also get closer to your ideal revenue.
And finally, on a daily or weekly basis, you should be intentionally tracking your finances and your fund balances so that you always know where your money has come from, where it’s being reserved for, and where it’s going so that you can stay in control of your profits.
Where to Start
The free CFO Starter Kit is intentionally designed to help you start doing all of the above and more. It’s a pre-built system to help CEOs develop CFO-level habits in one simple place. Over time, you may find different tools or systems that you can grow into once you get more comfortable with the routine. But the CFO Starter Kit is definitely the place to start learning more and implementing today!
Click here to read the rest of the CFO Habits Series here on the blog
