Speaker 1: Hey Mike, welcome back now to week three of the intensive series.
Mike: I’m back. It’s great to be here again.
Speaker 1: We’re having a blast so far. Hopefully, everyone’s done their homework after last week. What do you reckon?
Mike: I give it 95%. The 5% who didn’t do it, put this on pause right now and do it now. Set up that bank account. If you’re serious about being profitable, you have to have that in place.
Speaker 1: Okay. So for the 95% of people that we think did do their homework from last week, let’s start into it, because in order to make profit, we can sell to a new customer, we can sell more to our current customers, we can reduce our expenses, and that’s where our focus is today. Mike, can you take us through some strategies to reduce our expenses?
Mike: Yeah. Again something last week, we have an estimated 40,000 companies globally now doing Profit First to different degrees. Some are full on board. Other ones have just got it rolling out. One thing we found as we collect all our case studies, we now have about 2,000 documented case studies. What we find consistently is any business, there’s probably that one out there that can’t, but almost any business can cut costs by 10% immediately.
What I want you to do today is look at all your costs, and this should be on your profit and loss statement. We talked about that in week one. You may want to print out what’s called your general ledger, which breaks down all of your different accounts, what your accounting system attributes about inflow and outflow of cash to. But look through your P&L and see where you’re spending money, and become hypercritical of it. Is this a cost or an investment? I want you to distinguish everything. A cost is money that you spend where once the money is out, there is no future return. It’s a one time tradeoff. An investment is something where you put the money out, and then there’s an ongoing return. So it has to be an appreciable measurable return.
I’m a member of three different organisations, and when I did this analysis for myself, one of them is called EO, is appreciable investment. I invest in this organisation. It costs $4,000 a year to be a member, and I can attribute extraordinary benefits and gains to it, financial and otherwise. I’m an active participant.
There’s another organisation that I won’t mention, I was in. I was spending about $2,000 a year, but I was getting no benefit. It’s because of me. I’m not actively participating, but the question then becomes am I serious going to actively participate, or is this something that I should cancel for now and revisit? So I cancelled it. You will find that, for many organisations, there are these different outgoing fees that are not necessary, or we’re not utilising fully.
The other thing too is when we look at software, one thing I consistently see when it comes to reducing expenses is, there’s lots of redundancy in software. For example, we purchased an emailing system, an auto-responder to send out emails to our prospects and clients. We also have a CRM. Well, our CRM has an auto-responder built into it that’s very effective, but we didn’t even look at it. We just said, “Oh, we need a CRM. We need a auto-responder. We need, we need.” These software packages overlap, so we cut the costs of some of those things, and we extracted all the value out of the fewer things we had.
The other thing you can do to cut expenses, and this is an extreme, but sometimes we’ll get so buried under expenses, and not sure what’s going where or who’s charging us for what, and we actually get confused. You look at a statement. You’re like, “I’m not even sure who this is and if it’s necessarily or not.” You can take a bold move, and I don’t necessarily suggest this as your first move, but you just cancel your credit card. When you cancel your credit card, all those vendors that are billing you, trust me, they will contact you. I mean, that’s their revenue. So they will contact you and say, “Hey, your card got cancelled. Please renew or reactivate your card.” That’s a way to see where you’re spending money and make a decision, “Ooh, is this an appropriate decision to be spending money or not?”
I am not saying to back out of any of your obligations. When you commit to something, I believe we need to be true to our word and commit to things. But sometimes we get lost in the quagmire or the mire, if you will, of all these different expenses, and don’t know where to start. Stop the cards and restart, and you can look what’s going on.
So that’s some basic ways to cut expenses. There’s others too. Bartering. Co-buying, teaming up with other people. Used, I’m a huge fan of used. I have used everything. Used cars, used furniture, used equipment. One example is my computers. I have eight employees. We redid our office. We went to a local Fortune 500 that was upgrading their computers, and they were giving away the computers to employees, but their employees didn’t even want them. So we took them, and they’re high end computers. They’re perfect for what we need, and they cost us nothing. They just asked us for us to remove them. So there’s always ways to cut expenses.
Whenever you consider something for your business, maybe more office space is the example I’m thinking of. You have to have the alternative plan in place first. That’s what empowers us to reduce our costs.
When I was looking for new office space, we found a second office space and the third option, which was renovating a portion of my house to fit eight employees. My house can only fit about three employees, so we had to expand and renovate space. But we knew the approximate costs for each. Then, when we went to our primary choice, this nice office suite down the road, we were very candid with the landlord. We said, “Listen. We love your space. It’s our preferred choice, but we have to be very economical, because we treat our business healthy, and we want to be very profitable, and sustainably profitable. So therefore, this is the position we’ll work to afford.”
Now, he was asking, candidly, for about $3,500 for rent. We said, “Our budget,” a month, “Our budget’s $1,000 a month.” We said, “It’s such a disconnect, we don’t even think this is something you want to consider.” He said, “You know what, let me think about it.” He literally came back a couple days later and said, “Here’s the God’s honest trust. You’re on the third floor of this building. There’s no elevator. People don’t like a walk-up like this. I’ll take $1,000 a month, and then after six months, let’s sit down and see if I can bump you up to $1,500, and then we’ll stick with that. Is that fair?” And we said, “Absolutely.”
So we acquired the space, not by being brutally hard negotiators, by taking advantage of someone else. We just had the facts going into a situation, said, “Here’s our options, and this is the budget we have that keeps us profitable. Did it work for you or not?” And if it doesn’t, okay, that’s fine for him, and good for him. But if it does, you get a good result. Now we love our office space, and we can afford it. More than afford it. We’re profitable.
Speaker 1: And you get exercise, because you’ve got to walk up three steps of stairs.
Mike: It’s true. People come in. We actually, at the very top, there’s water up there, and it says, “Emergency water supply,” at the top of the steps.
Speaker 1: Hey, Mike, one of the things that’s going through my mind is, as a fitness business, I know I think quite often it’s hard to allocate the time to do this kind of analysis of our expenses, even though we’re sitting here and probably going, “Yeah, this is going to be very worthwhile, us going through all of our expenses, and seeing if there’s areas that we can cut down on.” How frequently do you recommend that we do this type of expense analysis for our business?
Mike: I do it quarterly. We do a quarterly profit distribution. Every 90 days, out comes a check from the business. I get a little excited about that and celebrate. Then we do our cost cutting, because I realise that the expenses start to creep up, creep up, creep up. Quarterly, I sit down for about three, four hours and cut costs, and say, “Is this really necessary? Am I really gaining benefit from this?” It just works. It just works. So it isn’t that time consuming.
I did find also, it’s better to tear it off like a bandaid, as opposed to try to peel it back slowly. When we try to cut one expense here, one expense there, that’s actually when it become overwhelming in figuring out what should I cut now? But when we just sit for four hours and just blaze through it, we cut all these unnecessarily expenses.
Sometimes, by the way, we do cut something that, “Oops, we needed that.” Trust me. It’s very easy to start incurring a new expense again if you have to.
Speaker 1: Okay, Mike, so tell us what’s everyone’s action to do between this week and our final week next week?
Mike: Okay, this is the big one. I want you to start allocating that percentage that we determined earlier to profit, plus 2%. Say you did that analysis in week one. You found out that you have 5% profit typically, or zero, maybe you’re at zero or you’re at a loss. Then we’ll just set it to zero. Wherever it was, your historical profit.
Week two, we set up an account. Today what we want you to do is every time a deposit comes into your business, out of that deposit, or if there’s multiple deposits in a day, add it all up and transfer that past percentage plus two. So if it was 5% before, plus two is 7%. I want you transferring 7% of your income into that profit account. If you didn’t have any profit before, you go from 0 to 2%. Transfer 2%.
What we’re doing here is we’re taking our profit first. This forces your business to A, be profitable, because you’re taking it first, but also we’re reverse engineering that profitability. You have to run your business off of the remaining money. It’s the best way to ensure permanent profitability.
Speaker 1: Mike, thank you very much for joining us for week three, and I can’t wait to get you back next week for our final week of this intensive series.
Mike: I’ll see you then.
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