One of my favorite TV shows is “Shark Tank.” I enjoy watching the entrepreneurs present their ideas, the judge’s reaction to the businesses, the questions they ask, how they apply their rationale around the valuations, the competitive nature of the judges themselves and the creativity around how they construct the deals.
One thing I am continually frustrated by is the number of seemingly successful businesses that appear on “Shark Tank” and have been in operation for a few years, and the excuses the entrepreneurs give for not yet making a profit.
On a personal note, I received a CIM (confidential information memorandum) from an M&A company recently. The M&A company was representing a company looking to sell its business. The company was in business for more than 10 years and had barely made a single dollar of profit in the past 5 years.
Surprising, yes. Unfortunately, all too common.
Profit Isn’t a Disease. It’s the By-Product of a Well-Run Company
You are in business to make a profit. You are in business to maximize profit. Remember that. It’s at the heart of entrepreneurship, and the MOST important part of being in business.
It’s not acceptable to:
– Reinvest all of your profits back into the business year after year to fuel growth (unless you’re Amazon).
– Take on so much debt to expand the business and ultimately choke the growth and operations on debt and interest payments.
– Spend your business’s cash frivolously.
And, it’s not acceptable NOT to pay yourself a salary commensurate with the work and responsibilities as a business owner.
I’ve heard countless reasons from different business owners as to why they’re not yet making a profit, or for that matter, why they aren’t paying themselves a salary commensurate with the scope of work they’re doing for the business.
Fact is, if your business isn’t making a profit after a few years in business, there is no reasonable excuse. Fix it or get a job.
Too many entrepreneurs are focused on the revenue side of the equation, and they forget how vital profits are. Yes, of course, I realize how important it is to grow the top line, but not at the expense of the bottom line. And if you’re not careful with expense management, salaries, debt and finance charges, and advertising dollars, you’ll watch your profits disappear.
While it is acceptable to grow your top line at the expense of the bottom line for a year or two, it isn’t acceptable to do that long-term. The model isn’t sustainable.
It also isn’t acceptable to run to the banks, VCs and private equity continually in search of dollars because you’re “so close” to profitability. Just a few more dollars and you’ll be there. Unfortunately for most businesses, profitability becomes an elusive goal.
So, where do you start if you want your business to become more profitable?
For starters, you need to pinpoint a minimum, and then a reasonable level of profitability that your business should be making. If your business isn’t at those levels yet, then work toward achieving those benchmarks. Do you even know what the profit benchmarks are?
If not, that’s where you need to start.
Let’s say your business is in the roofing industry. I pick that because the roofing industry is top-of-mind at the moment, having gone through a huge windstorm a few weeks ago and some resulting roof damage that needed repair.
After doing some research, let’s say you can figure out which competitors in your industry, either roofing or construction, are making a minimum of 8% profits (as a percentage of sales), and the average firm is making 12%, with the best-run firms making 15%.
Where does your firm stand vis-a-vis your competitors?
Do you even know? Is this something you’ve ever investigated?
If not, let me introduce you to a Peter Drucker, marketing and management guru, and an expression you likely have heard before, but if not, you should know:
What gets measured gets improved.
The first step to improving something is understanding the metric in the first place, and then, carefully and over time, working toward and making tweaks to different things that will help improve the metric.
When I was running my business, I typically looked to make anywhere from 10% to 15% bottom line as a percentage of overall revenue. I watched my business’s cash flow daily and very carefully managed all expenses.
Unless you are running a new start-up, I’m going to suggest that 8% is probably a minimum threshold for most businesses, but again, that’s going to vary from business to business and industry to industry.
When you finish reading this post, I want you to take a look at your financials.
What percentage is your business at?
Where do you want to be?
Understanding those two numbers is the start to improving your business’s profitability. The more profits it makes, the more you have to expand it, and in turn, your wealth.