Start with This Financial Metric (Financial Priority Formula Part 1)
Sep 16, 2024In the latest episode, Shannon introduces a groundbreaking framework for financial focus set to transform how entrepreneurs manage their business finances. If you're an entrepreneur overwhelmed by financial metrics and unsure where to begin, this episode offers a clear roadmap to prioritize your financial strategy.
Shannon recounts a recent discovery call that led to the creation of her new financial priority formula. The prospect expressed a myriad of financial needs, prompting Shannon to develop a framework focusing on seven layers of financial health. The starting point? The gross margin—a metric often overlooked but incredibly potent.
Gross margin represents the stripped-down profitability of your actual offer, not your entire company. In simple terms, it’s the money made from selling your product or service after subtracting the direct costs of producing and delivering it. Many business owners focus on the extremes of their Profit and Loss (P&L) statement, like revenue and net profit, while ignoring the crucial middle ground—the gross margin.
Shannon used an e-commerce business as an example to illustrate gross margin. For an e-commerce store selling clothing, the gross margin would be the selling price of the clothing minus the cost to produce and ship the item. This metric reflects the core profitability of your products or services.
For service-based businesses, calculating gross margin can be more complex and subjective. It involves considering payroll for staff, software costs directly related to client service, payment processing fees, and other direct expenses. Despite its complexity, understanding the gross margin is vital as it reveals whether your core operations are profitable.
The gross margin serves as a diagnostic tool for financial health. If your gross margin isn’t positive, it’s a red flag indicating that your core business operations are not profitable. Shannon highlights that this metric is crucial, not just for the overall business but should be broken down per product or service. This granularity allows entrepreneurs to identify which offerings are more profitable and which might need to be revised or eliminated.
Shannon suggests tracking your gross margin monthly over a 13-month period. This timeframe allows for a comprehensive year-over-year comparison, giving you insights into seasonal trends and the long-term trajectory of your business’s core profitability. By regularly monitoring this metric, you can make informed decisions about pricing, cost management, and product focus.
Understanding the gross margin is the first step in a layered approach to financial health. Shannon likens it to a culinary experience where focusing on too many dishes at once can lead to a lack of enjoyment and satisfaction. Similarly, trying to address all financial needs simultaneously can result in confusion and inefficiency. By prioritizing gross margin, you set a strong foundation for further financial analysis and optimization.
This episode of "Keep What You Earn" marks the beginning of a series where Shannon will delve into the other layers of her financial priority formula. Future episodes will explore additional metrics and how they contribute to a comprehensive understanding of your business’s financial health. Shannon’s approach ensures that listeners not only learn about these metrics but also have the time to implement and reflect on them before moving on to the next layer.
In conclusion, Shannon’s new framework offers a clear and actionable path for entrepreneurs to improve their financial focus, starting with the gross margin. By paying attention to this often-underappreciated metric, you can gain critical insights into your business’s core profitability and set the stage for sustained financial health. Stay tuned for the upcoming episodes to continue this enlightening journey through the financial priority formula and transform how you manage your business finances.
What you'll hear in this episode:
02:32 Limit power sessions to savoring one dish.
03:17 Focus on one area at a time.
09:03 Identify profitable offers through in-depth profitability study.
If you like this episode, check out:
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The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.
