It is an interesting question to ask a business owner “why are you in business?”
When asked you get a wide variety of responses. However, very few respond with anything to do with making a profit.
In fact many business owners started in business due to immediate circumstances more than any other planned or strategic reason. Very few would site profits as the key motivator.
Because of this we believe the subject of profitability doesn’t receive enough attention. It is almost like ‘Profit’ has become a dirty word, which means it not talked enough about, it is not analysed enough and certainly not enough is done about improving it.
We would like to challenge owners and their thinking in regard to profits, which is the primary goal of this article.
In business we all understand, or think we understand, the importance of profit and what profit is, or do we?
At Simply Business our definition of business is “to solve a persons want, need or problem – at a profit”.
What is profit?
According to common business definition it is; “A financial gain, especially the difference between the amount earned and the amount spent in buying, operating, or producing something”
We would extend that to say that there are two types of profit in business:
- Operating or trading profit – which is the financial gain from producing something as per the definition above. This profit is critical to pay reasonable salaries, pay dividends to shareholders, while retaining sufficient funds to invest in the growth of the business. Operating or trading profit is measured on an annual basis and measures the short-term health and wellbeing of the business. Profit has many stakeholders such as employees, shareholders, banks and your suppliers.
But what about the long term? We would like to introduce you to the second type of profit;
- Enterprise profit – which is the value received on the sale of a business less the net assets. The enterprise profit is the ultimate reward for the effort, energies and risks of being in business, which for an owner can only be realised once. However statistics tell us that 90% of owners don’t achieve what they thought they would when they sell their business. In other words they didn’t achieve an acceptable enterprise profit for their invested efforts. Enterprise profit is the ultimate reward of being in business
Our philosophy in business is that profit is not a dirty word – profit is the prize – it is reward for being in business.
We have developed a set of what we call the fundamental profit questions all owners and leaders need to ask:
- Is your business making acceptable profits?
- Are your profits growing?
- Are your profitability levels in the upper quartile of your industry sector?
- As business owner are the rewards sufficient for the effort, energies and risks of being in business?
- If you sold your business today would you achieve an acceptable enterprise profit?