Profit is not an accident

All too often, when presenting business owners with their end of year financial reports, I would be asked the question “Where is the profit?” The common consensus appears to be that profits should be cash in the bank.

The accounting principles, however, dictate that profit is applied on the balance sheet in the form of debt payments, asset purchases, amounts owing from customers and stock holdings.

I beg the question: if the business doesn’t have the cash does the profit really exist?

Is there a guarantee the stock holdings will be converted to sales and hence cash? Will the customers pay their accounts? Does paying down debt benefit the business or the business owners in the short term?

It appears to be commonly accepted that Business Owners have little or no control over their profits and far too many treat it like a surprise at tax time when they learn how much profit they generated for the year. A bit like an excited kid hoping Santa will grant them their wish at Christmas.

Profit is not an accident.

A business owner can control the profitability of their business, if they take responsibility for understanding how their business makes a profit, and which actions they need to take to produce a profit.

These actions involve acknowledging the basic principle of profit; profit equals income minus expenses. It goes without saying that in order to make a profit your income must be greater than your expenses.

However, it is not uncommon for business owners to incur expenses with the expectation, or rather, hope, that they will generate enough income in the future to cover those expenses. They spend now on the basis they will land a dream contract or a windfall of large sales in the future.

In reality, there is no guarantee of future income, and a business owner can do little to control it. On the flipside, a business owner has the ability to control and minimise the expenses of the business.

A business must operate, or live, within its means to be profitable. If income drops, so too must expenses.

This may mean having to make drastic cuts and look for alternative methods to generate the income for the business.

When was the last time you sat down and took a good look at your expenditure, with the view of cutting it back?

It may not be possible to reduce expenses significantly overnight, however a simple review of your profit and loss, or better still, the transactions within your bank statement will identify those costs which you may not require.

Up for a challenge?

Once you have culled the “low hanging fruit” of the expenditure items, its time to start thinking more creatively about ways you can significantly cut costs and improve the bottom line.

The logical step is to look for alternate suppliers or ask existing suppliers for lower rates.

Even better, would be to consider removing the expense altogether. The process of stepping back and considering how essential the expenditure is may trigger innovative ways to achieve the same results.

Bringing in an external party will help you achieve this more effectively, as they are not as close to the business and can look at avenues from a different perspective. I recommend you consult with your accountant, business adviser, or trusted colleague to assist with this process.

Take a chance. You may be surprised at what you come up with.