Profit is a fun word. What business owner doesn’t like to profit? But what is it, really?
As defined by Investopedia, Profit is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit that is gained goes to the business’s owners, who may or may not decide to spend it on the business.
Profit is a reward for risk taken in the business. Business is the wealth creating institution of society.
But many companies and CEOs I work with make the mistake of not focusing on profit.
My friend Bob Thies sent me the book Profits aren’t Everything, They’re the Only Thing by George Cloutier when I first started my consulting practice over 10 years ago. This book changed my thinking, and it is one of my most gifted books.
At first, the author comes off like a hard-ass, with chapters titled, Love your business more than your family or It’s not economy stupid, it’s you, but his points are valid. I later met George on Nantucket. He really isn’t a bad guy, but he believes these things. We discussed his process to address troubled-company turnarounds which helped me create the turnaround framework I use today.
I have worked with hundreds of companies over the last 10+ years in my consulting firm. Some companies I work with do very well and just need financial expertise on their team, but many of the companies that hire me are losing money and are having huge cash flow problems. These companies didn’t focus on profit and let things get out of control. These situations need immediate action. Once you dig yourself into a hole with big losses and eroding retained earnings on your balance sheet, it’s hard to dig out.
The key is profit.
To be more profitable business owners must think profit in every decision they make with respect to customers (or patients in the medical world), product pricing, employees, vendors, etc. Owners need to understand the business complete cost structure; they need to think activity based costing (i.e. all costs – cost of sales expenses and all selling, general and administrative expenses relate back to product costing/segment costing/practice area costing). CEO’s need to evaluate their customer profitability, vendor profitability, and employee profitability. They may have to make huge personal sacrifices like missing the kids game or not taking vacation, and make difficult decisions that affect employees lives. I’m not saying this should be a lifestyle, but there may be times it is necessary.
If your business is unprofitable, unless you’ve saved cash reserves when things were good, the problem need to be addressed ASAP. The answers are generally apparent, although the solutions may not be. We sometimes think, “Just sell more.” It doesn’t always work that way. Don’t bury your head. I have done that, and it never works out. Develop an overall operating plan, look at your cost structure and customer profitability and focus on hitting the numbers; live and die by the plan. If you miss the numbers, re-adjust until you hit your targets–the most important of which should be PROFIT.