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Salt Lake City Bookkeeping Blog

Entrepreneurs Need To Talk Profitability

Posted by Matt Roberge on May 2, 2018 9:00:00 AM

Entrepreneurs Need To Talk ProfitabilityHow come business owners never talk about profitability?

Ok, that is an exaggeration, but why don't business owners talk about making a profit more?

Think about it for a second; when you ask someone how business is going what do they typically talk about?

In my experience, one of two things, either annual revenues or number of employees. 

People say things like:

"It's going great we hit $2.5 million last year!"

or

"Business is awesome, we grew the team to 50 people this year!"

How come nobody ever says:

"It's going unbelievably well, we increased our profit margin by 3% last year!"

Is it because it's boring? I guess profits and profit margins aren't as sexy as annual revenues and number of employees.

In my experience, many of those business owners that claim to be having a great aren't. Not all of them, but the majority of them.

It appears and feels like business is going well, but when you get real and analyze the situation things aren't always going that great. Numbers don't lie.

If you didn't already know this American's seem to love debt. On the surface, the new family that just moved into the neighborhood seems super successful. Nice family, nice cars, super nice house. They must be successful, right?

You don't need me to tell you that is not always the case. In fact, I would argue that the story above is rarely true.

Much like in life, people run their businesses in a very risky manner that leaves them vulnerable. 

And you just don't know who is truly successful. It's not like small businesses walk around handing out their P&L and balance sheet. 

However, I will tell you that many business owners run unhealthy businesses. No surprise to you on that I'm sure. 

The Truth About Profits

One truth about profits is that as a business is growing the profit margin is actually declining. This is fairly normal because when you are really small profit margins are typically quite high. You don't have a lot of overhead and you typically aren't spending much money to try and grow because your funds are limited.

Another truth about profit margins is that most small business owners don't have a clue what their actual profit margin is. Even if they do it is most likely outdated and inaccurate. 

You should know your profit margin off the top of your head, no questions asked. 

So, First Profits, Then What?

If you haven't read Profit First by Mike Michalowicz it's probably worth a read for you. It's a pretty well-written book for a newer business owner. The book is mostly about making sure that you get paid first as a business owner. It is about staying on a budget.

When I read the book it just made sense. To me it was very obvious, meaning that I agree with him because it is the only way to run a business. 

Making profits in business is important, but then what?

Vision, Mission, and Core Values

When a really small business starts to grow they for some reason ignore or forget about the basic fundamentals of a successful business. They tend to get swept up in sales and trying to do everything. They get busy, being busy. 

Taking the time to establish and write down your company vision, mission, and core values are important. It's kind of important to know what you do (mission), where you want to go (vision), and what you believe as a business (core values).

Likewise, it is equally important that these items are written down and communicated to everyone on your team. As you hire people you need to make sure that they align with your vision and core values. 

The Acceleration of Marketing and Sales

As your business starts to grow it is an exciting time. It's actually working!

You also find yourself with more money, but also more bills and financial obligations. 

If you weren't concerned with sales from the very beginning I'm hoping that you are by now. 

At the end of the day, sales can solve a lot of problems. Mark Cuban, claims "sales cures all." I have to admit the first time I read it I totally bought into it. However, as I'm maturing in business I realize that this statement is only mostly true.

The right types of sales can solve a lot of problems. However, if you are selling to the wrong people that won't do a lot of good. While you may gain a few customers in the short-term you won't retain them in the long-term. Additionally, you may lose some of your good current customers because of the bandwidth you wasted on the bad customers.

As you grow you need to figure out how to attract the right types of prospects to your business and convert them to customers.

Building a Great Team

Hiring is really hard! I've learned that the hard way. When we started hiring people I just figured they would want to work because I had a job. I don't know if I could have been any more naive. 

Assessing skill set is the easy part of hiring. You will find a ton of candidates that look good on paper. The big question is will they work well for your business?

You need to understand if each new hire truly aligns with your mission, vision, and core values. And believe me, that is no easy task. If you ask them straight up if they align they will say yes. The tricky part is figuring it out for yourself.

Above everything, I firmly believe that cultural fit is the most important thing to look for when hiring. 

Business Culture

Why is cultural fit so important to your business? Simply put, because it sucks working with people that you don't get along with naturally.

The majority of people spend more time with their coworkers than their family. Do most businesses consider that when adding new team members to the business?

Why are we so picky about choosing friends, spouses, etc. Yet, when it comes to business, for some reason, people seem to be less worried about who comes into your trusted circle. That is crazy!

Assessing cultural fit when hiring is difficult, but not impossible. You certainly can't write down your culture, hand it to a candidate, and ask them if they align with it. When interviewing for a cultural fit you need to ask the right questions to assess whether they will align with your current culture. 

First, you need to understand your current culture. You also must realize that your business culture is always changing. While you can influence your company culture, you cannot control it completely. 

Constant Improvement by Driving Home Core Values

The last thing I want to talk about is striving to create an environment that supports and expects constant improvement of the business. 

The Greek philosopher, Heraclitus of Ephesus, said it best: "Change is the only constant in life."

Don't ever say the phrase "because this is the way we have always done it."

Don't ever scold an employee for bringing you a new idea or questioning the system.

You should constantly be aiming to improve your business and processes, not just to remain competitive, but to strive to be a leader.

You do that by encouraging innovation throughout your business by driving home your core values through your daily actions throughout the entire organization.

Profits Will Follow Great Companies

If you constantly strive to be a great company, profits will naturally follow.

However, create a business from the very beginning with a goal to generate a certain level of profitability.

As you grow, hold yourself and your coworkers to your profit goals.

Do not create a business that is constantly struggling.

Oh, and do me a favor. The next time you ask someone how their business is going and they talk about profits please make an introduction to me. I want to buy then a beer. 

Are you happy with your profit margins? Is it time for a change?

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Topics: Entrepreneurship, Growth Coach, Profit Coach