Profit in your Small Business
Have you ever heard someone say: “I don’t do it for the money, I just love helping people”? This too is a load of crap. We work to make money. There is nothing I want more than to spend time with my family, so if I have to do something, and that would include work, I want to make the most of it. If I have to work, and I do, I am going to make the most money I can, and so should you.
With that said, we start businesses to make a profit. Somehow in our country, the word profit has become a four letter word. I am here to give you permission to make a profit, and for that matter, a BIG one. You have to give good value to your customers, so by default, there is a checks and balances system in our country. This is the beauty of working in a free market.
No one is holding a gun to anyone’s head making them buy your product or service. They can choose not to buy it, at the price you are offering, and over time you will realize, you have to lower your prices and make less profit, BUT if you are commanding a premium in the market and people are willing to pay it…AMEN?
I am not saying; take advantage of your customers when you have the chance, this type of business owner looses in the long run. If you are consistently able to command a higher price, because you build value into a product or service, I say go for it. Ultimately it comes down to your value proposition and if you’re bringing more value for the money, you are on track.
A customer once told me at the tail end of our project, I was the highest bidder. He then went on to explain that, after using us, he realized we were actually worth more than he paid. That was the ultimate compliment because our high price was justified by the service we provided.
Have you ever bought something and after the fact thought, wow, this is way worth the price. In my painting business, we use a VOiP phone system, and I am constantly thinking this. It costs very little for all the functionality it provides. I would love to pay less, but I feel that I get way more value for what it costs.
Contrast that experience with a time when you picked something based on low price. I know we’ve all done this, you chose the cheapest option and when you actually used the item, you think, “This thing is a piece of junk.” Then you have to spend more money to buy something else of higher quality. Once I did this with a computer, I thought I was getting a great deal and when I got it home, it was one big paper weight. Guess what I had to do then? Go buy another computer.
In the “One Minute Entrepreneur,” Ken Blanchard wrote: “Profit is the applause you get for taking care of your customers and creating a motivational environment for your people.” How true this is, I dare you to find a business that is extremely profitable and does not take care of its customers.
Apple is the fantastic at taking care of their customers and making a profit. They are constantly trying to work on the user experience for their customers, and they provide exceptional customer service. Have you been to the Apple Store recently? I can’t ever think of a bad experience I have had at one of their stores. If I had one complaint, it would be that there are always so many people in their stores, and yet they always do a great job of talking to each customer as they walk in and then pointing them in the right direction.
Profit is essential for businesses of all sizes, and just an FYI…profits are not what is left over in the check book at the end of the month. I’m always surprised at how many business owners do not understand the following definitions: gross revenue, direct costs, overhead, gross profit and net profit. For those of you that have a firm understanding please skip ahead, and those that need a refresher, keep reading.
Gross Revenue: The total amount of all money collected for goods or services.
Direct costs: Any expense that can be directly attributed to a project or individual item sold.
Overhead: All expenses a company incurred to run the business, but can not be attributed to any one project or product.
Gross Profit: Amount of money left over from the sale of one product, one sale, or one project after all direct costs are subtracted.
Net Profit: Amount of money left over after all direct costs and overhead costs are deducted.
Profitability can be affected by a number of things. You may have a healthy gross profit, but your overhead may be too high to sustain. Or you may have low overhead, but you are not grossing enough from every sale to make any money. Both areas of your business need to be looked at.
If you do not have consistent profitability, you will struggle to stay in business and, if you are not profitable, you merely own a job. Profits are needed to maintain a healthy business and should be used to grow, provide added income to the owner or owners and in down cycles maintain the company
If you are making a profit doing what you are doing…good job! If not, what is it going to take? Do you need to make some radical changes? How fast can you make things happen? Don’t just keep doing the same thing, hoping to get different results. It won’t happen.
One thing you can do is learn how other businesses stay profitable, AND the best way I know to do that, is to listen to us on Small Business Naked. Each week we will be interviewing successful small business owners that have found ways to be profitable. If you aren’t profitable, you aren’t successful.