Transcript #149 Three Pro-tips When Planning for Profits

Arise2Live Podcast

Transcript for Episode #149  ‘Three Pro-Tips When Planning for Profits’

Intro:   Happy New Year from the Arise2Live Podcast. This is episode 149. Many of you are making plans and goals for next year and today Scott shares 3 pro-tips to make better plans to increase business profits. Everyone makes plans, but the purpose of this episode is to bring clarity and perspective to make real plans that work.

Let’s get started.

Scott R. Weaver:     0:32

Hello everyone, I am Scott Weaver the Arise2Live business coach. Thank you so much for listening today. This episode is about professional tips to add depth and strength to your planning process by considering the components of profit, that is, understanding where your business profits really come from and plan for them.

Before we get going, a quick reminder to please share this podcast out with other business owners and leaders, or people who might find this helpful. That’s so much appreciated.

I do hope that this podcast is not too dense, I just really want you to win this next year.  I want you to really improve your business and your profit going into this coming year.  When I do that, sometimes I get overexcited and I just dump everything on. But these three professional tips, I think, will really help your planning. I think it will help you succeed, and that is really, really what I want.  So take notes. Feel free to pause it. Here we go

At this time of year many of you are planning for the upcoming season and the year. Of course, we all want our business to do well and that includes to be profitable. Which is where this episode comes in. Presented today are three pro-tips to add in your planning stages that will increase your success to get increase profits. I tend to look at it this way: Everyone make plans and set goals.  However, the most prosperous business owners add extra spice into the plans that others don’t. I’ll be talking about some of the extra spice, a lot of extra spice.

I do need to say that this episode is a follow-up, a deeper dive if you will, of Peter Burke’s interview titled, ‘3 components leading to business profits’, which was the previous episode, #148.  That show will be linked in the show note. While it’s good to listen to that interview and get some insights there, this episode is meant to be a standalone. It is here to help you focus on your planning for next year in your business by identifying three specific things that you can put into your plans so you can do better.

First, I will start out with a quick review of the three components of profit that we talked about in Peter Burke’s interview and then move forward.

The first component is that profit is a lagging measure of the business contribution to customers, employees, and community.

The second component is that profits require serving others by enhancing your customer’s gain and reducing their pain.

The third component is profits require leadership and organizational skills from the owner in the basic process of make it, sell it and keep track of the money.

Today, we will focus on the first component, that is, profit is a lagging measure of business contribution, your value that you’re providing. This depends on a lot of things coming together. A lot of things have to work before profits come in. Recognizing that profits, the actual number and dollars, tell us what happened in the past and not what’s going to happen.   That concept alone, that profit is a past measurement of past performance, makes you a better business planner.

On top of that, if you can recognize your business contribution, your contribution to customers, your contribution to employees, and even the contribution to the community at large, when you truly recognize that and can identify it, this is where the pros separate themselves from the other people. I want you to be a pro.

In other words, at the end of the day, profits depend on serving people. Increasing profit is not about dollars or a spreadsheet number – those are the scoreboard, not the field of play– it is people who are in the field of play.  They’re not on the scoreboard.  Providing value is the direct link between dollars that we’re looking for in profits, and people. It is the customer who pays you, it is your team that makes production and sales happen, and for most of us the dollars left over at the end of the day to provide for family and friends. It’s people.

5:25

Profit itself is a scoreboard, like a scoreboard in a sport game. It shows the score of the game at a particular moment in time and at the end of the game, the final score. It shows what has happened before, it reflects on the past effort that is needed before the points got on the scoreboard. Profit – It can be cruel, just like a scoreboard, you can’t change it after the fact.

But let me point out that the use of the word ‘profit’ has several meanings.  The most basic definition of what profit is, is from the equation that profit = revenue minus expenses.  While that is true, too many people oversimplify it and only look in the context of a business building, and we call that operational profit. Just what the operations do, that is profit.  Some even consider owner’s compensation as profit— it is not. Owner’s Compensation goes under employee expenses and there’s a lot of benefits for the business owner to do that.

The profit meaning I’m using is net profit, or sometimes called total profit. It includes everything operational in the business, plus debt payments, capital purchases, owner’s comp, taxes, and even personal property taxes if you follow the Profit First system.

It would not surprise me if some of you listeners are holding your breath, thinking ‘Oh no, I’ve been using operational profit instead of net profit.’ Please don’t beat yourself up. Every business owner has gone through that phase, but this episode is about planning for the future. If you are in this situation where you only consider operational profit and not the bigger picture, now’s the time to start planning to size your business for net profit. And if this was all you did-for planning for next year, you are better off and for me personally, I will have seen success in this podcast and reaching my overall mission to help build stronger businesses.

Okay, let’s get on to better planning. Repeating again, if you only focus on profits, then you find out at the end of the game whether you have won or not. That’s too late to make any adjustment or improvements. Here is the trick: Think of profits as the output.  The results of all your planning and efforts that go into doing the things to generate profits. Sort of like a professional sports team, they plan and focus on scoring points with the scoreboard at the end the result.

 

Pro-tip #1: Use Leading Indicators    8:26

 

So business pros, they focus on the plan and scoring points, and then they let the scoreboard present the results. Focus is on the doing, not the end of the game. This gets into the first pro tip; you create better plans and goals if you use leading indicators.

Again, you create better plans and goals if you use leading indicators. Let’s start with the difference between a leading indicator and a lagging indicator. Knowing this helps you build a better business.

Lagging indicators measure things from past performance. They are easier to measure, but very, very hard to change. Think about filing taxes. We have to do it every year.  Your report of financials over the past year and then filing it off, it’s done. It is difficult to change afterwards. It is difficult to change your revenues at this point, but your bookkeeper can easily tell you what they were.

Lagging indicators like counting: counting dollars, counting units produced, counting headcount, etc. In this counting, they also have the uncomfortable truth about it, because the past decisions that have already been made, it just becomes the undeniable truth. To be honest, I don’t like to see some of those. I like to see the good results, not the bad. The lagging indicators say whether you won or not.

Using lagging indicators, it is difficult to plan for the future because you do not know if you will succeed until everything is said and done. That’s the key limitation of a lagging indicator. Great scoreboards and they’re useful there, but too slow to change things.

Leading indicators, on the other hand, is a measure of today’s performance towards the future. Let me say that again, leading indicators is a measure of today’s performance towards future goals. They are harder to measure, but they are much easier to change. It does take time to think of good leading indicators because of the link between a task done today with the reward in the future.

An example of a leading indicator is, let’s say in sales, the number of phone calls you make to potential customers. The more calls you make, the more likely of getting new customers. The leading indicator is the number of phone calls.  That is linked to a lagging indicator of the number of paying customers.

Leading indicators can be a compass along the way to see if you will reach your profit goals. If on track, great, keep doing the great work. If things are off track, then there is time to make course corrections.

Leading indicators do need something to make them useful because you have to think about what they measure. And this gets into the next tip.

 

Pro-tip #2:  Know Your Business Contribution         11:37

 

The second tip is that you create better plans and goals by knowing what your business contribution is to customers and employees.

This is directly from the first of the 3 components that leads to profit.

So the trick here is having people focus, adding value, to both customers and employees as a means to increase profits. If you can identify what your business contribution is, what it truly is, it’s almost an existential question, “What is your value? What is your purpose?”

So by identifying and knowing exactly what your contribution of value is, you can create some pretty good plans, some awesome plans and goals. In other words, serving and pleasing your customer is the path to increasing profits. This doesn’t mean you throw expense controls out the window, you still need to be smart about things, smart about expenses.

Similarly, as a business owner or leader, your contribution to employees, having a focus on meeting some of their needs is one way to increase your profits through higher productivity. Maybe your contribution is just paying a decent wage with the benefit that they stay longer or providing up-to-date equipment that increase safety. There is a lot of ways to contribute value to employees but treating them like pieces of equipment has not been a good strategy for long-term success.

I have to admit, there is an implied suggestion to increase your workforce expenses, but that needs to be balanced with the overall gains in productivity or in the case of safety, decreasing secondary costs, such as insurance or worker’s comp. The secondary impact can lead to increased profits. There’s a lot of examples out there. Seek out examples of businesses in your industries that have figured out this balance and see if you can use some of those things. Seek out examples in your industry that have figured out this balance and see if you can adapt them into your company.

The point here is that your business has good and unique contributions. Make plans to build upon them, to strengthen them in a people orientated manner.

I suggest that you write out your business contribution, what you do for customers and employees. Study the list to see how you can do better and build a financially stronger business.

 

Pro-tip #3:  Implement key performance indicators           14:09

 

The third pro tip is that you can create better plans and goals by implementing a few key performance indicators or KPIs is what some people call them.

KPIs are leading indicators that help you to know if you are on track or not towards the destination or goals.  Again, the performance indicators, KPIs are leading indicators that help you know if you are on track or not towards the goal.

Looking back at the sports analogy, again.  In American Football, there is a key performance indicator called “first downs”, advancing the ball 10 yards with the reward of getting more plays. No team gets points on the scoreboard for first downs, but the number of first downs is a pretty good indicator of whether you will score a touchdown or not. In soccer, there is a KPI called ‘Pass Completion Percentage’, which is kicking the ball to another player without the other team getting the ball. The more pass completions indicate more goals. Both touchdowns and goals are lagging indicators, but first downs and pass completions are leading indicators.

So in your business you need to identify KPIs for your business, like the equivalent of getting first downs. So think about it. What are some? What are a few KPIs that indicates that you will be successful? What types of activities lead to success with customers or employee performance?

Choosing the right KPIs can increase your profits. Please take some time in the next few days, or in your planning session to think about what KPIs you could use to improve your business.

 

Key Performance Indicator tips        16:03

 

Here are a couple of practical tips for KPIs.

• Only pick a few to use, especially, if this is the first time for you. Even just one can be sufficient.
• Make these KPIs easy to use, easy to track things, make them obvious for you and your employees. Simplicity is the name of the game. Of course, larger companies will have multiple KPIs, but still simplicity is important.
• There is no single KPI or KPI group that covers all businesses. Why? Because there is a zillion different types of businesses out there. So don’t get hung up on the perfect KPI or if somebody else is using a different one. Just pick and use one that works for you.
• Link your KPIs to people but measure the task. Going back to the sales call to get potential customers, the leading KPI is the number of calls, but you can’t stop there because just making calls is not enough– all you need is some robo-dialer and you’re done. But that won’t work. The number of calls is necessary but not sufficient.  When you connect and link the calls with your business contribution to people, then the sales called become a communication tool, a way to communicate to another person about the value that you are providing and how they can access the value.  Adding in the people factor greatly increases the ability to get more customers and that definitely leads to profits.

There you go, three professional planning tips to strengthen your plans and goals to increase profits.

 

Re-capping here         18:04

 

First one is improving the success of your plans by knowing the difference between leading indicators and lagging indicators. Your action plan is about doing things about the leading indicators that will improve the lagging indicators.

The second tip is to improve your planning and goals by knowing what your business contribution is to customers, to your team, and to the community.  Figuring out and improving your value contributions often leads to profits.

The third tip is implementing a few KPIs, key performance indicators. Use them like a compass so that you know if you are successful doing the little things that lead to increased profits.  Again, if you are just starting out with KPI’s, just use a few of them and choose very simple ones and easy to track.

In conclusion, you can have a better business and a better tomorrow by tracking your business progress by knowing the components of profit and that starts out knowing that profit is a lagging indicator and there exist leading indicators that will tell you if profits will increase before the end of the game. You can know ahead of time. Just knowing the difference between a leading and lagging indicator means that you’re already planning much better.  Pinpointing what exactly is your business contribution and value to people, really, focuses your planning in the right direction and reduces distractions and narrows the focus to opportunities that are in line with your goals. Of course, when you’re planning, use a few KPIs to so that you know you’re in the right direction. KPIs, they actually strengthen your business processes and all of that just increases the likelihood for profits next year.  Once again, doing these three things, this is what the pros do, and you can do them, too and a lot of good things can happen if you follow these.

Why are all these necessary?  Because focusing on profits alone is like driving downtown by only looking at your rearview mirror, something that won’t work in the long run. So look forward to the future. Look forward to creating your excellent plans and goals that are based on improving your contribution to people.  This is one way to Arise2Live.

 

Sponsor      20:45

 

Today’s sponsor is Arise2Live business coaching. A professional and structured system to get business owners to grow and gain freedom from the chaos of running a business. Scott uses a proprietary four step system to get you the results you need. Start running a thriving business, not a self-created job. Schedule a call today on the Arise2Live.com website.