How confident do you feel in your ability to parse financials and analyze profit?
Today my friend Danielle Hendon joins us to talk about operational profit. We are both big proponents of creating operational profit for two reasons:
- The more profit a business has, the more enjoyable it is and the longer the business is able to survive and thrive
- As a service provider you have the ability to drive the operational profit inside a business
Danielle will share her financial framework on how we can be a driver of change in a business.
Danielle Hendon is the founder and owner of 4 Corners CFO, a firm offering financial advisory services to small business owners on a scale that fits their company and budget. Coupling her decade of experience in corporate finance and accounting with her passion for people, Danielle brings the benefit of “big business” financial analysis to entrepreneurs. Now, instead of helping corporations increase share price, Danielle gets to help business owners increase their personal livelihoods so they can leave a legacy and lasting impact on their community.
Describe and define operational profit
- When a business hits a certain point, they start hiring more administrative people
- When they are at that point in their business, their profitability sits in their productivity (rather than revenue-generating)
- These hires have to increase productivity and help the business make more money because other things are more efficient (operational side of profitability)
- On the front (marketing) side of business, they are able to generate profit faster and an ROI because they are attached to a sale
- On the operations side, we have a little more to do to to produce ROI
- We need to show our leadership how we are bringing profit into a business
Danielle’s Six Part Framework
- When it comes to finances, the balance sheet is your anchor
- A balance sheet needs to be reconciled by a bookkeeper
- Everything needs to reconcile and it needs to have all of the information
- Revenue: there are three levels that can be pulled to increase the profit line
- Raising rates
- Profit margin: the revenue minus cost
- Operational profit: how much time is going into the business
“As an operator you want to show the leader the impact you are having in the business.” – Natalie Gingrich
“When you can cut the amount of time it takes to do something for a service provider, it goes straight to [the business owners] bottom line.” – Danielle Hendon
- Look at the Expenses
- Bottom half: expenses such as payroll, office expenses
- Break everything into 3 categories
- Required expenses: what ways can you reduce these
- Personal perks: something that doesn’t add value to the business but does benefit the business owner
- Investment in the business: it should be returning time, money, or both
“If it’s not returning value to the business, we don’t need it.” – Danielle Hendon
- Build a Budget
- Every business should have a budget that will give the expectation of what you want to spend
- From a financial perspective we are modeling where and how we think revenue is going to come in
- For operators it is important to be aware of the budget, and why the business is not hitting the budget based on the budget to actuals comparison
- If you can find efficiencies, even if it doesn’t fit in the budget, do them!
“The goal is not to hit the budget, it’s to understand why we don’t hit the budget… and if the ‘why’ is a really good reason, let’s keep doing it and change the budget!” – Danielle Hendon
“Don’t have a ‘set it and forget it’ budget… start with some kind of foundation, and learn as you go!” – Natalie Gingrich
- Cash Flow
- If you don’t take your budget and convert it to cash flow you don’t know what is going to be in the bank
- There are things that show up on the balance sheet that don’t show up in the P&L and therefore don’t show up in your budget. They need to be in your cash flow.
- Savings: you need to save for taxes
- Profit distributions: the owners should be taking profit out of the business and not burning themselves out
It is important that we as operators understand and partner with the genius behind the money, and serve as the integrator of the info that the money team is able to bring. We are now better equipped to create operational strategies that make a big difference in the bottom line.
Connect with Danielle
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