224 - Profit Margins and their Impact on Hiring with Melissa Houston
On today's episode of the podcast I talk with Melissa Houston, CPA and financial strategist for CEOs, about the importance of profitable businesses and increasing your networth.
Melissa helps successful business owners increase their profit margins to keep more money in their pocket and increase their networth. she is a columnist at Forbes and host of the Business Society podcast.
Small businesses benefit from a fractional CFO, a part time CFO for your small to medium-sized business (solopreneur to 10-50 employees with 7-8 figures a year) important to do your financial planning. A different look at small and medium sized businesses than the tax code that typically defines a small business as under $25 million in revenue.
Too often business owners are focused on revenue, but if you're not bringing in and growing your profit, you're not going to last. 82% of businesses fail due to financial mismanagement because either you're spending more money than you're making or you have cash flow issues.
Money is a vulnerable topic and we can carry money stories from as early as childhood with us as we grow our business. For example, if you struggle with pricing your products, that's a money mindset issue. You need to price your services to your value.
Cash is queen! We often think about the importance of having an emergency fund of 3-6 months of expenses, but that also applies to our business because we all experience ups and downs in our business. When things are great, you need to think about the amount of cash you're putting aside when times get leaner to make sure there is more longevity to your business.
When you are assessing your cash situation, let's say things are going well and you're saving money in your reserves, you need to plan ahead. You also have to consider lines of credits where you can pay interest on what you're borrowing, or loans. These are harder to get in the leaner times than it is when you have more money that can back them up.
Post-COVID, it won't hurt you to have 6-12 months of savings, including owner's salary as a business expense. Too often Melissa sees business owners paying themselves with what's left over as opposed to budgeting to pay yourself regularly because everyone has personal expenses.
It's also okay to reinvest in things that will make the business more profitable, but you need to keep ahead of it so that you stay profitable. You should include your salary before considering your profit margin because you have to pay yourself. Braden refers to profit before salary your owner profit and your profit after salary your business profit because that's what goes on your taxes.
Profit can often look like a bell curve. In the beginning of your business your profit is kind of low because you may have expenses with little to no income. Then as the business grows you become more profitable, and then as it grows even more, you may hire more employees which may help increase revenue but make your profit go down, though 20% profit on 1 million dollar is still more money in your pocket than 50% profit on $100,000. It all depends on the business. Sometimes it's not the case to hire before you're ready, it depends on the workload you're dealing with, how it will increase your revenue, and how that increase and revenue and paying your new hire(s) will impact your profit.
What do you need to show before you're ready to hire? If it's between
a) Three consecutive months of profit to hire a person without an immediate ROI or
b) I have enough saved to hire and pay a person for six months on top of my emergency savings.
you'd want b. Having a 6 month runway is helpful, but it's still important to punch the numbers to see how it all works in the larger financial plan.
Melissa advises even if you have in-house accounting support, you should always outsource your tax accountant. Not all CPAs are tax professionals, some are focused on other topics like profit optimization. It's also great to have a second set of eyes on your books. Your bookkeeper is not your CFO.
Get in Touch with Our Guest
Melissa Houston, CPA, fractional CFO, and financial strategist for CEOs
Get Melissa's free 5-Step Roadmap to Biz Finance Freedom! on her website
Listen to her podcast, The Business Society Podcast
Find her on Instagram, Facebook and LinkedIn @melissahoustoncpa