More Than You Spend

by Bill Collier

How much profit should your business be making? It’s a great question for any business owner.

Let’s first tackle these basic questions:

1. What is “profit” anyway?
2. Who needs to make a profit?

What is profit, and who needs it?

For now, forget about the formal accounting definition of profit. Let’s look at this in a simple, common-sense way.

Profit simply means taking in more than you spend. And every business must do this to survive. Period.
In fact, any organization must take in more than it spends. Even nonprofits. (One notable exception appears to be our own government!)

My basic premise: Every business must earn a profit.

Now for the accounting drivel.

In the small-business arena, “profit” usually means pretax profit – the bottom line on your income statement.

So, one of the critically important pieces of information becomes: How does the owner get compensated? Is his or her salary included in expenses along with the other employees’ earnings, or is it taken out of bottom-line profits? That’s your choice, but for the purposes of this discussion, let’s assume it’s included in expenses. This means that our profit is what’s left after paying the owner’s salary.

Isn’t break-even good enough?

So, you’ve paid your employees, covered all expenses and paid yourself. What’s the big deal about making a profit beyond all this?

What about increased costs? Will your utilities go up? Don’t forget supplies, repairs and gasoline.

The reality: Your costs are going up. Why wait and play catch-up? It’s better to get ahead of the expense curve and create a cushion. Being profitable helps you do this.

Beyond simply covering expenses, though, are the ongoing needs of your operation and employees. Software needs to be upgraded. Computers need to be replaced. Employees want raises. Health insurance goes up every year. Where does the money come from? Unless you’re printing cash, the answer is simple: It comes from ongoing profitable operations.

And don’t forget that debt principal payments don’t show up on the income statement, so you need profit to service debt.

But I have to pay taxes on profits!

Yep. That’s sad but true. But wouldn’t you rather be ahead of where you were last year after paying taxes than stagnant and owing no tax?

So then, how much is enough?

The answer, after all this, is “It depends.” You have to look at your business’s cash flow, your growth trajectory, your debt and other factors to help you decide. And be sure to benchmark against your own industry’s average profit to help you set a target.
The bottom line – literally: You have to take in more than you spend.

Bill Collier is the St. Louis-area coach for The Great Game of Business. He works with organizations that want to improve financial results, engage their employees and create a winning culture. He can be reached at 314-221-8558, GreatGame.com/stl, GGOBSTL.com or bcollier@ggob.com.