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Profit is often heard as a four letter word. As small business owners that want to offer products and services that create a lasting and positive impact in the lives of our customers as well as our own… we have to get comfortable with profit.
Profit is not something you take from your customers. Profit is the consideration you are given for the improvement of your customer’s lives over the cost of having done so.
That value can come from the creation of a product from raw materials, the delivery of a service or maybe even in offering a product in a location.
In this episode we’re going to talk about establishing an appropriate profit margin for your business that you will be comfortable with as an owner, which fits into the goals you have for your business and is going to meet the expectations of your most ideal customers.
You might want to refill your coffee now!
Let’s get comfortable with profit!
Reminder: What is a Business Principle?
When I talked about what made a business principle I ended up here:
A business principle is a concept that is both foundational and relevant to all businesses.
This set a pretty high bar when it came to identifying what were business principles and what were strategies, missions and tactics.
Profit made the cut and that’s what I want to cover today.
Profit is the standard measure by which companies large and small are evaluated. While profit alone doesn’t create a full picture of a business, it is used frequently as a shortcut or first order tool to determine how a business is doing.
More importantly, profit is a good indicator of the direction of future cash flow. As a rule, if net revenue is positive and our business is profitable then it is generally true that cash flow is also positive. Of course, there are a lot of factors that impact this but it’s a good start.
A Note about Non-Profits
Are non-profit organizations (NPO) exempt from profit concerns?
Yes… and no.
While it’s true that non-profits don’t have to worry about making a reportable profit, they do have to worry about the direction of their cash flow.
When it comes to NPOs the ‘profit’ they need to be concerned about is how well they are able to magnify the effect on a cause of a donor’s contribution over the ability of the individual donor to make an effect themselves.
Get OK With Profit
Before we go any further we need to get okay with profit. There’s a lot of misunderstanding and misinformation about business and profit in general. The term ‘profit’ itself seems to have gathered a negative connotation in today’s popular culture. If a news story comes out about a large company doing something that appears to put profit before people then it reinforces this negative stereotype.
Well, I’m here to tell you that businesses need to focus on, be comfortable with and even seek (yes… SEEK) profit.
We use the cash generated by our well run business to:
- Run the Business
- Pay Down Debt
- Increase Working Capital
- Fund growth
- Create an Emergency Fund
- Give to Charity
- Create Owner Value
These and all the ones you can think of that I didn’t list are reasons that we need to be comfortable with and plan our businesses around profit.
Factors That Put Pressure on Profit
As you can imagine there are a number of factors that put pressure on profit. Some put pressure to reduce profit and others add pressure to increase it.
- Competitive Landscape
- Customer Expectations
- Economic Environment
- Growth Funding
- Owner Return & Benefit
- Operating Costs
- Savings & Emergency Planning
- Future Company Valuation
Ethical Considerations - How Much is Enough?
So… the inevitable Question… “How much is enough?”
Honestly, this is a question only your conscience and your customer base can answer.
My input on this is pretty simple. If you offer a product or service that is either unnecessary or easily replaceable with an economic alternative then you are free to profit to whatever extent the market will bear.
If you sell wakeboards for boating or jewelry you can let the market forces guide your profit. This is because neither of these are necessities.
I like the example of a Rolex vs. a Timex. Rolex is free to profit as much as their customers will allow because Timex and other watchmakers offer economical alternatives so customers are now bound to the Rolex product.
When you offer necessities like food or medical products/services there is, in my opinion, a moral duty to develop a business model around ‘reasonable’ profit.
I realize that ‘reasonable’ is ambiguous and represents a moving target. I think of this as a thought experiment and guideline to consider depending on your business.
Basically… something to think about.
Service Based Businesses & Profit
Is it possible for service based businesses to achieve 100% profit? You know… Revenue - Expense = Profit with “0” Expense?
Your service based business will always have one expense and that’s you. If you think you’re achieving 100% profit you are not paying yourself.
To better understand the operations of your business pay yourself a competitive salary and evaluate your business with its true costs in mind.
Watch Your P&L
Regularly review your Profit & Loss Statement (aka Income Statement) and look for profitability and trends over time.
Use this information to restructure the parts of your business that impact your profit.
Use Profit to Test Business Changes
You can use profit to test new products, price points, markets and customer segments.
Plan for Profit
Whether you offer physical products or professional services start with the idea of profit when you design your offering. If a product can’t meet the profit requirements of your business it needs to be redesigned, replaced or simply discontinued.
How do you achieve profit? Drop a comment with your thoughts. Connect with me to keep in touch and share ideas!
How much profit is enough? Drop a comment below and share what you've learned!
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