Updated: Nov 24, 2019
My accountant gave me that piece of advice years ago and I ignored it. "Don't chase revenues, chase profits." Being a young entrepreneur, I was cocky and thought I knew a lot more than I actually did. I saw my revenues skyrocket in 2011-2013 and I was on top of the world! To keep up with the growth, I had to hire more people. We kept growing and growing and I felt great.
Then I saw my Profit & Loss sheet. I looked at the comparisons in the years before and I was devastated. "How could I be growing at such a rate but I have less money in the bank?" That's when my accountant should have said, "I TOLD YOU SO." But she is kind and repeated: "Don't chase revenue, chase profits." I thought it was the same thing. This is my story and what I learned.
Lesson 1: You can make $1 million and be broke.
Revenue is defined as the money your company brings in. Every nail trim, groom and bath, add to your revenue. It is super important, must be monitored and compared with previous months and years to make sure you are growing. But increasing revenue, particularly in a service-based business, also means rising expenses (i.e. payroll and taxes). The key is to watch the ratio of growth to expenses. Sometimes taking that extra dog doesn't pay off.
Lesson 2: Just because you are growing fast doesn't mean you need to add more staff.
We couldn't keep up with the phone calls and the dogs. It was a great problem to have but I must stress, it was a problem. My reaction was like many business owners: hire more bathers and groomers.
My accountant was urging me to wait; she wanted to look at my break-even number.
Your Break-Even number is determined by a formula. It shows how many dogs you need to groom (in a month) to break-even and pay your bills. That is the least amount of dogs needed per month. Once break-even is determined, you then start to speculate: "If I hired another groomer and bather, it would cost me $X amount of money per month."
When added to the expenses, a new break-even is determined which would raise the
number of dogs needed in a month to cover just the extra expenses.
Is it doable? Is it worth it?
Lesson 3: Prepare for the worst.
If I did my break-even numbers (as I was told), I would have found that I could afford extra staff....barely. Thankfully, my naivety did not bankrupt my business. What happened instead was all those larger checks I wrote myself at the end of the month got much smaller. And the extra money I was putting back into my business was a fraction of what I had been doing the previous years. It was hard for me to understand this at the time because I was bringing in much more money than before, it was just going out the door just as fast. Month after month I was waiting for my big break. I knew that we could do even more dogs now and that it would all be fine. Then the unthinkable happened.....a salon opened up down the street.
Lesson 4: If you focus on your profits you can weather any storm.
Because I did things backwards, focusing on revenues and not bottom-line profits, I did not have much extra money in the bank when my business lost sales from a new salon opening. Instead, it felt more like a direct hit in the game Battleship. We recovered quickly and I credit most of it to my faithful accountant who sat down with me and explained where I went wrong and how to fix it.
We looked closely at my Profit & Loss sheet and figured out what expenses needed to be cut to get back to a level of profitable growth. What that meant? I needed to let go of a few people. It forced me to groom less dogs - but the numbers didn't lie. Even though my overall revenues went down with a reduction in staff, my profits began to soar again with the savings in payroll expenses. In addition, we put a loyalty plan in place to keep my regulars from straying.
Lesson 5: Listen to others...there is so much more to learn
I am not as smart as I think I am. I went from chasing the money to slowing down. At my largest, I had 13 employees. Now, I am back to 7 and feeling much stronger as a business. There are times when I want to continue to grow...the phone calls are coming in. But I sit down, pull out my spreadsheets and do the math. I learned so much from this experience and I hope I could share this with you.
I'm a shampoo distributor too, so I visit salons all over the southeast each week. Many are experiencing HUGE growth (because they are good at what they do). But I see it on their faces. I see the stress and the confusion.
I rarely talk financials with my shampoo clients because:
1) it's wicked inappropriate coming from their shampoo vendor and
2) it is none of my business.
But, sometimes I hear my accountant's sage advice in my head, "Don't chase revenue, chase profits." Some salon owners have even said to me that they thought growing would have been easier. I get it. It's super exciting to be the salon that everyone wants to go to. It's great when you see large deposits each day. Control the growth as best as you can and always, always watch the numbers.
If you have similar stories, please share them below. If you were able to grow and not lose profits - love to hear your secret!
It you think you need more help, I have an eBook called, Limited Funds: Creative Ways to Earn More Profits where we provide to you advice on knowing your numbers, action steps to get financially sound, plus a few spreadsheets to track everything - including break-even point. Take a look to see if this could benefit your business.