Business Performance & Financial Management Series #4
“Are You Focused on Maximizing Profits?”
There are a variety of reasons that you started in business. A dream, an opportunity, perhaps you never really set out to own a business but you became an expert and created a unique niche. Maybe it was to be able to offer employment to family, or to give something back to your community and society.
However you arrived at becoming an entrepreneur, as a business evolves it is easy to become overwhelmed by the myriad of operational issues, management considerations, and competing interests. Invariably, the time, energy and financial commitment necessary to run a successful business often pushes aside the original objectives of owning and operating a business.
Regardless of how you arrived to be where you are now, it is my belief that your overriding goal should be to maximize your profits!
By profits, I mean gross profit prior to taxes, staff and shareholder bonuses, and for example any special projects such as donations, or giving back to communities and charitable organizations etc.
Now you may disagree with my assessment regarding profits. For example; if you are a sales agency you might argue that your focus should be sales as that is what drives your business. Or, perhaps you believe that profits are a by-product of exceptional service or quality products.
Here is why I believe you need to focus on profits:
- Profits are your true measurement yardstick. Although you may focus on sales and sales growth, a variety of productivity metrics, or overhead. At the end of the day, or month or year, the profits that you generate should be how you measure the success of the period. You (and potentially other investors such as family, friends and banks) have made an investment both financially and emotionally, and as such you need to receive something in return for this effort.
- If your internal compass does not measure success by dollars, but rather by some other metric such as employment opportunities, better wages, or donating time or expertise, you should still focus on maximizing profits – because the greater the profitability than the more there is to share.
Maximizing profitability should be viewed in the context of achieving your financial, operational and personal objectives. Therefore, the starting point is to determine what profits are required for you to satisfy these objectives. Once you know your profit target, then you can work backwards to assess what is required to achieve it. For example:
If you determine that you need $400,000 in gross profits to allow you to make a desirable wage, an appropriate return on assets and investment, have a world class office environment, and allow for future growth plans, then you can work backwards to determine what are the best systems, or product mix to allow you to meet these profit objectives.
What if in your business, in order to increase sales 15%, you were to offer an extra discount of 3%, increase your marketing budget 5% and hire an extra sales rep. Would these costs in attaining increased sales be in alignment with the business objectives of maximizing profitability? And, would you be able to determine if they were?
It is imperative therefore to know what your profitability target is. Then, measure accurately, monitor regularly, and modify as required to ensure that your business is on track to maximizing profits.
Jim Melville, CPA, CA