Parkinson’s Law: “The amount of time which one has to perform a task is the amount of time it will take to complete the task.” That is why when we are given two weeks to do a project it takes two weeks, and when we are given eight weeks to do the same project it takes eight weeks. That is why when we are given $1,000 to complete our work we get it done with $1,000 and when we are given $10,000 to complete the same work, it takes $10,000.
It’s the adage that “the demand upon a resource will expand to match the supply of the resource.” In business, the resource is cash. The demand is spending aka expenses. Supply is your bank account balance.
Maybe you’re an owner and have experienced it? Sales are increasing, money is coming in, but there’s still no profit left for you – the owner.
That’s because of Parkinson’s Law. The supply of money is there, but now the demand has expanded to match the supply. In layman’s terms, “if you don’t tell your money where to go, it will find a place.”
Parkinson observed something else in his law – scarcity of something triggers frugality and creativity, two of the essential building blocks of a successful enterprise.
So now consider the same scenario: The sales are increasing, money is coming in, but now you intentionally set aside a percent of that money for profit and with what’s left, the scarcity, you will learn to be creative and frugal with your expenses.
When you make your business’ profit a priority and extract that amount first, the money left over for business expenses lessens. This forces you to find ways to get the same things done for less money. (Scarcity met with creativity and frugality.)
HOW DOES THIS WORK IN REALITY?
Concept sounds good, right? But how does one implement this concept?
Let’s start the implementation process first with considering the basic accounting formula of Income minus Expenses equals Profit.
Income – Expenses = Profit
The problem with this formula is that it plays right in to Parkinson’s Law. Whatever is left over, IF anything is left over, is your profit.
So let’s re-prioritize the same accounting formula to Income minus Profit equals Expenses.
Income – Profit = Expenses
This forces you to meet the demand of your expenses by being creative and frugal. And it is also prioritizing profit. Because isn’t that why you went into business?
HOW DO I PRIORITIZE PROFIT?
Utilizing this new accounting formula, you set aside a certain amount of your income as profit first – before paying any other expenses. That means that you prioritize profit before payroll, utilities, inventory, etc. When you prioritize profit in your business, you can “be profitable” after your first sale.
The next step is to determine allocation percentages to profit, owner’s compensation, operating expenses and taxes. This portion of the implementation can be challenging if you try to do this on your own. That is why there is a 5-week coaching program to help you do this, taught by a Profit First Advance Professional like myself.
If you are ready to prioritize profit in your business, I can help. I will guide you with a process so that in just 5 weeks, you will not only be growing your profit (which begins on day 1), but you will have funds set aside for payroll, taxes and other expenses. For more information, view our webpage: www.SaundersTax.com/ProfitFirst.php
RESULT OF PUTTING PROFIT FIRST?
When you decide to intentionally prioritize profit, it enables you, the business owner to:
⦁ Be profitable immediately
⦁ Be intentional about expenses
⦁ Stay in touch with your money
⦁ Be ready for growth opportunities
Ready for growth in your business? Contact Saunders Tax & Accounting at www.SaundersTax.com or call us at 301-714-2071. Open Monday – Thursday 9 am to 5 pm. Awarded the Hagerstown Chamber of Commerce “2023 Small Business of the Year” and Hagerstown Hotlist 2024, we have been providing a Less Taxing Life and More Prosperous Solutions for 40 years!
