Five keystone pillars of profit (Part VI): Pretax net profit

Sixth article in a series

By Jim Yount

Profit Pillar Number Five is Pretax Net Profit, which is defined as “money left over after paying operating expenses.” The dichotomy of Profit Pillar Number Five is the opposing force between business owner(s) working long hours all year to produce a positive pretax net profit and the IRS representative seeking a declared portion.

Be advised that I am not a Certified Public Accountant. However, business owners do not need to be a CPA to know the differences between profit and loss, cause and effect, and how to take corrective action. My corporate life responsibilities included moving products produced in the USA to foreign countries for distribution. In reverse order, I was responsible for importing products into the USA for distribution throughout North America. Participating in these activities is cause for being challenged by the IRS. I won some battles and lost some battles. My CPAs “J&C” have been great defenders and representatives.

As an elective, I took accounting and bookkeeping not realizing the subject would become a dominant force throughout my corporate life and the decades of owning and operating Jim Yount Success Dynamics LLC (JYSD).

In keeping informed, I have on my desk a copy of Accounting for DUMMIES by John A. Tracy, CPA. Between the covers are 386 pages. I recommend purchasing a copy and assigning time to become familiar with certain subjects. At the front of the book, turn to “Contents at a Glance” and the “Table of Contents” and review the information. Then, turn to page 353 (in my copy) and invest time in reading the “Glossary, Slashing Through the Accounting Jargon Jungle.”

I share the preceding few paragraphs for the following reason: It is the business owner’s highest priority to understand “the only way to keep score in business is to count the money.”

“Five Keystone Pillars of Profit” illustrates how each of the pillars is used in strategic business planning. Each of the pillars provides a means of documenting, measuring, and tracking business success or the lack there of. It is vital for all to know the ways to count the money.

Let’s go back to the beginning of this article and discuss Pretax Net Profit (Profit Pillar Number Five), which once again is money left over after paying operating expenses.

Profit Pillars:
 

One. Net Sale. “We all live by sales.”
$3,400,000

Two. Cost of Goods (sold)
-$2,400,000 

Three. Gross Profit
$1,000,000

Four. Operating Expenses
-$1,037,000

Five. Pretax Net Profit
-$37,000

There is no money left over after paying operating expenses. For the lack of pretax net profit, ambition will wane and dreams may vanish. Doors will be closed. I have seen this happen numerous times. In a normal business year, not influenced by recession, this could have been prevented. Even in a recession, this may have been prevented dependent upon debt load. For the lack of strategic business planning, success is lost.

Here’s how to make a difference most of the time. Dealers/retailers can learn to live well on sales of $3,400,000. Dealers/retailers must begin practicing the art of questioning and challenging themselves. For example, was the cost of goods purchased at the lowest price? Was the inbound freight prepaid? How much excess inventory will be carried over to the next business year?

Can the gross profit margin be improved? Yes, the gross profit margin of 29.41 percent can be increased. If the gross profit margin is increased by 1 percent to 30.41 percent on sales of $3,400,000, that’s an additional profit of $34,000. A 2-percent increase in profit margin will generate $64,000. With professional and experienced guidance, the gross profit margin can work its way upward to the mid-30s and beyond, but not all in one adjustment.

Operating expenses are too high. Cost of staffing represented 66 percent of gross profit earnings. Learning to operate more efficiently with one less employee could eliminate the negative $37,000. After reviewing the complete chart of accounts, based on experience I am confident that you can eliminate an additional $75,000 in excess expenses, possibly more.

As I bring the “Five Keystone Pillars of Profit” series to a conclusion, I say this to everyone who has taken the time to read and apply the pillars of profit principles. I’ve frequently been asked, “Jim, does what you teach work?” My response is always the same: “Yes, our strategic business planning works every time it is used.”

In closing, allow me to share the following real-life story about a gentleman that I had the privilege of meeting several years ago. We both had been retained by a major OPE manufacturer to speak at a convention in Florida. I will refer to this dealer as “Mr. D.” He had been successful, and his business had been booming. He had 15,000-20,000 customers on file and 20-25 employees on his payroll. In order to ensure continued success, he began his search for new marketing strategies, and he purchased the latest computer system and software to track results. Mr. D said, “I wanted to be able to take my business to the next level of profitability and performance.” He hired two CPAs and put them in charge of financial matters, but his plan led to the demise of his dealership.

“How could a dealership with two CPAs ever get into financial trouble?” said Mr. D. “Well, it can happen. It happened to me. What happened was that we moved too quickly and too far from the basics. All of a sudden, I didn’t look at the daily deposits, the monthly bank statement or canceled checks. I didn’t monitor the mail. I didn’t dissect accounts each month like we would in the old system.”

Then, came the day that Mr. D walked through the accounting department and saw an overdraft notice for his payroll account. Mr. D began to dig deeper in the accounting department and found more inconsistencies and huge problems. Mr. D discovered the shortfall in his cash position was much greater than he could’ve ever imagined. After weighing his options and the financial risk versus reward, Mr. D decided to close his business.

 “It was my lack of attention to simple things that led most quickly to the demise of my company,” said Mr. D. “First, dealer principals need to open their own mail. I had not opened my own mail for two years. If I had done so, I’d have known about the mishandling of affairs nearly immediately and would have had time to react.”

 “Remember, it is your business,” Mr. D added. “Insist on daily business activities being done the way you think they should be. Also, I’ve learned that just because a person has a degree, title or license, you shouldn’t automatically assume they know more than you do. It is your business, your money and your future on the line. Finally, if you don’t see the results you want, don’t delay action thinking it will get better or people will change over time. It doesn’t work that way.” Mr. D took full responsibility for the closing of his business.

As for the “Five Keystone Pillars of Profit,” they are simple, but not necessarily easy. I encourage every person that has taken the time to read the six articles in this series to dedicate themselves toward learning and applying each of the five profit pillars. They will serve you well.

Your success is too important to assign responsibility to anyone other than yourself.

At JYSD, where we are in our 32nd year of teaching business owners how to earn more money, we would enjoy hearing from you. Send me an e-mail at jimyount@hughes.net or give me a call at (903) 796-3094.

 Jim Yount is the founder and chief executive officer of Jim Yount Success Dynamics LLC. For more than 30 years, he has hired, trained, managed, sold, marketed, and motivated. Extensive real-world experience in retailing, distribution and working with manufacturers, both domestic and international, has earned Jim the reputation as a trustworthy and knowledgeable professional in his field. As a results-oriented speaker, he is dedicated to inspiring groups of 30 to 3,000 to develop their talents and realize their full potential. As a business consultant, teacher and coach, Jim is experienced at challenging leaders to explore their operational procedures and change unacceptable practices that are producing poor results. For more information, contact Jim at jimyount@hughes.net or (903) 796-3094 or visit his website at www.jimyountsuccessdynamics.com.