Inventory Genius Method: Net Profit

In this part of the Inventory Genius Method series we're working to develop a firm understanding of net profit in your inventory based business. Net profit is one of the main focus areas that make up what it takes to become an Inventory Genius. And while you'll often hear business owners noting, focusing on and bragging about their top line number (their gross profit), the net profit is the real litmus of whether or not a business is thriving (or even surviving!). 

Net profit is what you are left with at the end of the day. It's what remains after the cost of goods sold is subtracted from the sales, and the expenses are all paid. The net profit is a key part of business but it's also a number I seldom hear people brag about. With the Inventory Genius Method, I'm working to change that. We need to have a much stronger focus on the net profit of our businesses.

As we get deeper into the Inventory Genius Method series, keep in mind that every story you'll read is real, and every business journey is a lesson for you as you make your way forward on the path to profitability. We have so much to learn from one another as business owners. I'm grateful to each of my clients who've been open to my sharing their stories and lessons in entrepreneurialism.

You can print these posts and highlight sections you find especially important. Or, you may just decide to take notes. Be sure to write down questions as you have them and reach out to me when you are ready for the next step or to share your realization moments with me. I want to celebrate your wins and applaud your efforts as you work to become an inventory genius!

Now...on to net profit! Let's take a deeper look at the significance and importance of this number in your inventory based business. Let's figure out how you can make it a number you're proud to brag about and to share with other business owners:

What would you do with an extra one hundred thousand dollars in your bank account each month? What about an extra ten thousand or even just a thousand? Net profit is what you are left with at the end of the day after the cost of goods sold is subtracted from the sales, and the expenses are all paid. The net profit is the number I seldom hear people brag about. 

According to the United States Chamber of Commerce, only 65.3% of small businesses are thriving while businesses that are in operation for five years have a failure rate of 50%.  

When I first started working with Cande and Jessi, they had two separate businesses in a small Iowan town—a boutique and a café. They had some non-negotiables in their business. First, family would always trump work. Electing to be open only a few days a week, they were determined to run their businesses efficiently without living in the back room and behind the counter every day of the week. The second was they would focus on the right things, whatever that took. I remember my initial consult call with Cande. I was at a business conference in Palm Springs, and I stepped outside to the courtyard to take Cande’s call. 

As I usually do for an initial consult, I asked about the business, its history, and what success looked like to them. 

Side note: Every owner needs to define success in their own way. We are too often pushed into the crowd of “you need a brick and mortar” or “you have to create a scalable offer” or “aim for a seven figure business.” It is time that we encourage businesses owner to define their own success. While multiple locations and a six figure salary might scream success to you, the owner down the street might say that a profitable business that was only open three days a week and provided a creative outlet for themselves and their community is success. 

Jessi and Cande had defined their own success and it looked like this: A business that was open a select few days a week, ministered to their community and provided them with a consistent paycheck. 

While well on their way, we still had some work to do achieve this. I say “we” because I had the privilege of walking alongside them for a few years as their profit strategist. However let me be clear that they did the work. As a coaching client you will define your own success and you will do the hard work. The coach is there to guide and hold accountable, but the client is the hero of their own story! Cande and Jessi were ready to do the hard work and focus on the right things, which included improving their net profit

See, as they dove into their numbers they quickly discovered that it wasn’t enough to meet their overall sales goals. They needed to adjust their cost of goods as well.

Already living pretty lean and mean on the expense side, their profitability would come from inventory. I have never worked with another client that was so ruthless about buying right (You could be next!). In charge of the financials side of the business, Jessi went to work figuring out what the price structure should look like to deliver maximum profit each month. She set up parameters for what she wanted to spend on an item in any given category. She started focusing on the right things, and she stuck to her guns, often telling Cande “no” to particular brands or items. They slowly turned around their cash flow situation, began to pare down their debt, and squirrelled away money for savings. They looked at their expenses frequently and continued to trim whenever there was excess. They set up a system to ensure they would receive a consistent paycheck. They paid off all their debt. They trimmed expenses more. Their constant focus was the bottom line—the net profit. 

Because at the end of the day, what is all the work for if we never get to keep anything? 

The more debt you have, the more imperative it will be for you to focus on profitability. Let me quickly correlate your lack of cash and your debt to show you what I mean. 

When a client and I begin working together, one of the first exercises I have them do is input all their monthly expenses into my workflow. Then we back up to their sales goals. Once this is complete, we scroll to the bottom of our shared document and see how the net profit looks. Fantastic! “This is basically what I am doing right now,” the client might say. “But even if I live this budget to a tee, I find myself short on cash each month. Where is it going?” 

For this, we move over to the balance sheet. 

We haven’t discussed the balance sheet yet, so right now is a great time to dive in. 

The balance sheet shows you where you stand at this moment in time, unlike the profit and loss statement that outlines what happened in the past. The balance sheet tells you the story of your business today using two main sections: the asset section and the liability section. A balance sheet shows you what you own in cash and anything that could be turned into cash (assets), as well as what you owe vendors, suppliers, the bank, and your customers (liabilities). 

If a quick glance at the balance sheet reveals a number of credit cards and loans, then we have identified where all the cash is going. 

What keeps you up at night? My lack of cash flow. 

Where do you feel stuck? I keep making sales, but I have nothing to show for it. 

So, we start to take a peek behind the scenes. Debt payments do not show up on a profit and loss statement. You can see the transactions on a cash flow statement and as the outstanding balances on your balance sheet. But if you are simply looking at your monthly profit and loss statement wondering why that nice black number at the bottom doesn’t match the balance in your checking account, it is time to see what your debt is doing to your cash. 

As you can see in the example above, if you are not focused on profit at all, you will really feel the cash crunch, much like 60% of other small business owners. And if you do happen to be one of the lucky ones in the 40% who are running at a profit on paper, but you have never considered your monthly debts, you will keep chasing the sales and keep scaling the problems right alongside them. 

Profitability not only writes your paycheck, it also gives you breathing room, cash to plan, and a way to build a solid balance sheet, one that is strong in assets and lean in liabilities. We will focus more on your balance sheet and profitability in the next blog post.

If you're looking for next steps beyond these blog posts, I invite you to get started with the Quickstart to Inventory Genius. 

The Quickstart to Inventory Genius is my keystone coaching roadmap. Three modules will quickly layout five things to focus on in your inventory based business. You can implement these five strategies right away in order to drive immediate profit. And with the Quickstart, I GUARANTEE that you'll double your investment through either making, saving, or finding that amount in PROFIT. The Quickstart really is the perfect way to get your inventory based business on the right track.

You may also consider joining the waitlist for my top tier mastermind program. The Profit Accelerator Mastermind is a profit strategy program that delivers amazing results for all types of inventory based business owners. It's a chance to work one on one with me and to dive into cash flow, debt management, and the profitability of your business. Interested in learning more? Join the waitlist here.

And if you want to dive deeper into the resources on my website, I hope you'll tune into The Inventory Genius podcast. The podcast is a one stop shop created just for product-based business owners. In the weekly episodes, you'll learn about all things inventory, time management, profit planning for retail, and more. You'll hear a variety of interviews, deep dive conversations on the nitty gritty bits of business ownership and a few fun and random episodes along the way.

And if you've made it this far, you obviously know about the blog. It's packed with invaluable information across a variety of topics. Looking for posts related to this one? 

→ Four Part Simplify Business Series  - A four part series where I tackle common inventory based business questions. I use my Inventory Genius Method to break the answers down into simple steps. These bite-sized, actionable steps give you one task at a time to understand, complete and implement in your own business.

→ Inventory and How it Works in Your Business  - Learn why and how your inventory is directly connected to your business' profitability.

Take a closer, more in-depth look at the three key things you can do if you know the numbers on your profit and loss statement are accurately recorded, yet you still find a net loss when you scroll to the bottom:

→ Increasing Sales  - More money on the bottom line. More cash in the bank account. A paycheck for you. All three of these goals can be achieved by increasing the top-line sales.

→ Increasing Margin  - You won’t simply be guessing, buying, guessing wrong, marking down, and repeating this ugly and unproductive cycle. You will be buying smarter, and buying smarter means more margin.

→ Decreasing Expenses  - Understand your numbers, so you can make wise choices about growth. Focus on managing your inventory, so it is working for you, writing you a paycheck from day one.