What do you think makes a profitable company?
Ask that question to a room filled with 100 business owners and you'll probably get 100 different answers based on their own experience and how they perceive their own profits. In truth, profit is a measure of all the money left over after you deduct expenses from the money you make from sales.
This equation has been around for as long as businesses have been around:
Sales - Expenses = Profits
Although the equation seems simple, most small business owners confuse the money they have in the bank, or their weekly paycheck (or draw) as their profits. In actuality, the real profit is the surplus money left over after the all the bills are paid, including the owner's pay. Furthermore, the profit is the money that the company can build up in its coffers without ever needing to dip into it again.
Your business isn't profitable if you have extra money in the bank this week, only to be needed to pay bills next week. Profits build over time. That's it. End of story.
Don't fool yourself. Your business is not profitable unless you are building extra money in the bank every week that you'll never need to touch.
I've been working as a business coach and mentor with the Bergen County chapter of SCORE, a national non-profit organization dedicated to helping emerging and existing small businesses maximize their potential for success. In addition to helping them with online marketing ideas, I've been helping many new business owners understand how to make their existing company profitable, or what to do to create a profitable company from scratch.
Usually the easiest way to make a business more profitable is to improve the workflow or processes of getting work completed. It doesn't matter if you are selling jewelry or making tomato sauce, every business has a set of steps they work through for every task. Once you establish your own set of steps it's usually difficult to reimagine a better way. It's usually difficult for all of us to step outside of our daily routine to find better ways to do our job, and this is where the business consultant or coach can help.
A business coach should challenge you to try new things, and improve your business methods, so you can lower the time needed to complete tasks while at least maintaining the same quality level of work. Lowering the time needed should translate either into lower payroll, or getting more accomplished in a single work day.
Faster repair work can translate into more satisfied customers. However, even though you managed to knock a 5 day repair job down to 2, you should still tell the customer there's a 5 day turn-around. That way, they'll be very surprised when you call them in 2 days to say it's done. This is called "over promising and under delivering," and it's an easy way to build a positive reputation.
If you're stuck on the hamster wheel of a 12 hour day, then getting your work completed more efficiently, and in less time, should free up your evenings. This extra time is not an invitation to move on to the next job and maintain those 12 hour days, this is time you, as the business owner, should be taking as your reward for improved business.
As an entrepreneur myself, I'll tell you that free time is just as important to me as the extra money that's accumulating in the bank as profits. There's no use having extra money in the bank unless you have the free time to take advantage of it.
Speaking of taking advantage of profits, let's cover that important point. As profits begin to build, you have the choice of reinvesting them back into the company or taking the profits as an owner bonus.
Reinvesting in the company could be part of remodeling or investing in new equipment. Don't use the money to pay a bill or pay for new marketing because those things should be part of your monthly expenses.
If you have a family to support, if you like to take vacations, or you want to sell the business some day, then you should be taking those profits out of the company quarterly as an owner bonus. A potential buyer for the business will surely enjoy seeing that you are taking a weekly paycheck as well as profit bonuses every 3 months.
As a recap, profit is a measure of the extra wealth a business can build over time without having to use that money to pay normal operating expenses. Although it's not part of the typical big business equation, all small business owners should include free time into that profit building equation. You should be striving to work fewer hours on the operational tasks of your business and more time on finding creative ways to expand the business. You'll be surprised how creative you can be when you are spending your free time away from the daily operations of the business.
Give me a call if you feel like you're stuck on a hamster wheel and your business isn't growing. I'd be happy to schedule a 1 hour, no obligation phone call to introduce what I could do for you as a certified Profit First Professional Coach.
