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Profit: Do You Have a Business or a Hobby?

The reason a business exists is profit.

That's not a popular thing to say. It sounds sounds cold and greedy. It's missing all the feel-good things like glorifying God in our work. Helping our community. Using our gifts. Leaving our mark on the world.

All of those things should absolutely be part of business. But it's healthy to peel them away and recognize that if you're not consistently turning a profit (or on your way there), you're really not in business–you've got an expensive hobby. 

Small business owners are often so attached to their businesses or engrossed in their day to day that they don't pay enough attention to their bottom line. It's time to get real about profitability.

What is profit?

Before I get too far into it, I think we should reflect on what profit is. After your customer pays the company and the company pays its expenses, whatever you have leftover is your profit.

Income - Expenses = Profit

The quickest way to see your profit is your Profit and Loss statement from your bookkeeping software. What it says on that bottom line is the profit. 

Why is profit important? 

Profit is often thought of as only benefiting the owners and shareholders of a business. However, it's more than that. Profit is good for everyone involved in your business: your customers, your vendors, your employees and you.

Profit is good for your customers.

As consumers, we don't like to think that a business is profiting off of our purchases. Your customers are no exception. They want your products or services, but they're not particularly interested in your profit. However, if you think about it, a customer should want a company to make a profit. A company's profit means that company has a good chance of being around down the road. It means they are motivated to make their products and services better. It means they can take care of their employees (and shareholders). Profitable businesses are good for customers.

Profit is good for your vendors.

A vendor has every reason to hope that you're profitable after paying for their goods and services. If you are, they're in good standing with you as a business partner which means you'll probably keep spending with them. However, if things are tight, you may be forced to seek out new vendor relationships.

Profit is good for your employees.

If you have employees, you can be sure they hope to see their career and compensation advance. Your ability to offer that advancement is directly related to your profitability. If you're losing money or breaking even, any additional expense like a raise or a bonus pushes you further in the red. However, if you're making a profit consistently, you can (and should) invest in your team with confidence. 

Profit is good for you.

Sometimes, I can be self conscious about my personal stake in profit. I have to remind myself that owning a business is an investment. I've risked my capital and invested great amounts of time and energy. I should expect my investment to provide a return at some point. Getting a return on your investment (profit) means financial reward and great satisfaction. 

I also have to remind myself that I'm on the hook for losses, too. 

How do you increase profits?

2 things drive profit. We saw them in the definition above: Income and Expenses. If you want more profits, you either need more income or less expenses –ideally both! Sounds good in theory, but how do you make that happen?

Increasing Income

To boost your income, you can sit around and wait for demand to grow, or you can take some action. 

  1. Set sales goals.
    Zig Ziglar said, "if you're not aiming for anything, you'll hit it every time." You've got to set sales goles. They give you a vision for what could be and demand action for getting there. For many business, just raising the expectations results in more sales.
  2. Offer new products and services.
    Ask yourself: what could we offer to our existing customers or to the market that would result in more sales and wouldn't cost much to implement? If your business is selling coffee, you could probably easily expand to selling doughnuts and pastries. If you design kitchens, you could expand to bathrooms. If you serve a particular geographic market, you could expand your service area. 
  3. Increase your prices.
    It's amazing to me how some companies never change their prices year after year after year. You're probably getting better and better at what you do and your prices should keep pace with the value of your offering. The market will determine how valuable your products or services area with their buying decisions. Give yourself a little credit and see what impact a small price increase has.

Decrease Expenses

Cutting expenses is even more immediate than increasing income. Your income could stay the same or even shrink and you could grow your profits by getting lean. 

  1. Cut the fluff.
    A lot of money heads out the door on non-essentials like meals and entertainment or even cushy office supplies. If profits are down, you've got to make sacrifices and live with the basics. $1000 not spent is $1000 back to your bottom line.
  2. Cancel automatic subscriptions.
    In my business we have quite a few online systems that we've signed up for on automatic payment then forgotten about. It's a little embarrassing to say, but it's true. Doing a sweep of your bank statement could turn up a few things you no longer need. 
  3. Re-evaluate what you're paying your vendors or suppliers.
    There's probably a vendor or two who's not as competitive as they should be. Might be time to get a few quotes and confirm the going rate. Give your preferred vendor the chance to keep your business, but if their value doesn't compete, give a new vendor a shot.
  4. Shape up or ship out your sandbaggers.
    If you've got employees who aren't giving their all, it's time for a talk. Let them know that you need them to perform at a higher level. If they're unable or unwilling, it may be time to part ways. In some cases, you may find you can live without them or replace them with someone who brings more to the table.

Taking action on these 2 fronts will begin to move the needle. 

What are your go-to ways for increasing profits? What holds your business back from being as profitable as you should be? Drop me a comment below.

Posted by Jacob Savage at 3:22 PM