Profit will come "someday".
My business will be profitable "later" once I:
- bring on that one critical hire
- hit my next revenue goal
- secure external funding
And the list goes on. All lies we tell ourselves to make up for the fact that we did not prioritize profit from day one.
I fell into that trap with my first software services business. We started out highly profitable yet that only lasted until we had a small team of dozen people. Right around the $2M revenue mark and two years in, something strange happened.
Owner compensation plateaued and profits shrank, while revenue continued to climb for the next several years. At $10M, I sold my stake and walked.
My partners and I were not unique. We looked at profit just like nearly every other business owner would. We looked at revenue, subtracted expenses, and discovered the remainder. That leftover crumb was our profit.
Our "solution" was to grow our way out. At some magical level of revenue, we would hit volume numbers that would produce windfall profits. Or that's how the story we told ourselves went.
I never saw that day. Not until I sold. Equity was my long-delayed reward. And even that took a hit due to how my partners and I had built the firm.
We did not prioritize profit from day one.
Therein lies the real trap. It had "just happened" and then shrunk once we started adding employees. Expenses grew as fast (often faster) as our revenue climbed.
I'm confident many of you are dreaming of that same magical day when profit will show up (again). Like your own personal pot of gold at the end of a rainbow.
Miracles happen every day but I prefer to make it happen through explicit means like processes and principles to drive the behavior I want from my business.
So, let's flip the script. Let's take profit first. Not last.
How can you grow quickly with a profit?
Early on in my entrepreneurial journey, I thought profits had to give way to allow for growth. As if they were mutually exclusive, I sucked it up and just accepted that my reward would come “later”.
I’d venture to say, you’re similar.
- Maybe you’re at the point where your profit is suffering as you embrace growth.
- Maybe you’re still highly profitable and long for the days that your business will begin to grow quickly.
- Maybe you’re reading this and still thinking about starting your own business.
Either way, I have news for you.
Growth and profit are NOT mutually exclusive
We’re looking at it backward. Profit should come first and whatever is left over should be used to fuel business growth.
For just about forever, generally accepted accounting principles (GAAP) have placed the focus on revenue and expenses. If anything remains, you have profit.
And, to make matters worse, your business can be profitable on paper using GAAP and you may never have cash-in-hand. Ouch!
Yet when you explicitly carve out profit from every bit of revenue and put expenses in their rightful place, you can have growth and profit.
More on wrangling expenses later on...
External funding sources just want your growth
I realize that taking profit first may be hugely unpopular. Especially, when compared to the “grow now, profit later” venture capital mindset.
That love affair with growth above all else creates some nasty side effects. It can sustain terrible business ideas long beyond their natural lifespan.
It's sad but almost none of those funded businesses will ever find a path to profit because they didn't prioritize it on day one.
Venture capital isn't all bad. It does have its place. As does growing rapidly, at the expense of some (not all) profit, but those situations are limited.
- startups creating new markets or massive categories;
- startups pursuing capital-intensive innovations; or,
- startups that need massive network effects to succeed
But I’m not talking about those businesses here.
I’m talking about the kind you own or lead — software services.
Service businesses require much less risk and capital to kickstart revenue. Plus, provided you can land a set of initial clients, your business can be highly profitable almost immediately.
In short, your software services business has a clear path toward profit.
Profit is the cornerstone of a healthy business
Profits are like an immune system.
Without profit, even the slightest threat can quickly kill your business. Profits build endurance, allowing you to roll with the punches and out-maneuver would-be competitors and unforeseen events.
Everyone is looking for ways to improve profit but most will never take the step that is critical to moving from "someday" profit to profit right now.
And it only requires a subtle shift in our relationship with finances. Simply put, you must spend less than you make by explicitly limiting your expenses.
While simple, in theory, it begs the question…
Why save when we can spend, spend, spend?
Collectively, we love to spend more than save. This is definitely true in the US and not just limited to our personal finances either.
I doubt America is alone here though.
In accounting, spending is the default. The concept of saving is a second-class citizen, at best. Yet if you flipped that behavior, your dream of a business that provides financial freedom could be here very soon. If not today.
Just like with anything else worth doing, you need to develop explicit habits around the behavior you want to nurture. You need to find the same joy in saving as you've had with spending.
Side Note: just imagine if Americans chose to "profit first" on a personal level by defaulting to saving overspending. It would hurt some debt-focused industries but, arguably, would be a net positive for our country in the long run.
That's where the concept of profit first can be hugely impactful. There are many variations, with fancy names, but the framework I love was created and cultivated by Mike Michalowicz after he tested and revised it in his own businesses.
Not only does Mike have a great business mind, but he's also incredibly fun to hear speak. While I've never had the pleasure of seeing him live, his audiobooks are excellent and keep me entertained with his lame humor and authentic desire to "eradicate entrepreneurial poverty".
What happens when you put this all together?
By subscribing to the mindset of "profit first", you choose your business over the misguided belief of "growth now, profit later".
Profit is the fuel your business needs to pursue sustainable growth, weather uncertainty and unforeseen circumstances, and reward the risk you took to step out on your own.
It begins with carving out profit from every single business transaction. Mike recommends starting small. By just taking 1% off the top as profit, you begin a new, healthy habit of choosing your business first.
From there, your business must subsist on what remains. This healthy habit will force you to review expenses and cut what isn't sustainable. Sometimes that means taking a hard look in the mirror and reconsidering hires, extravagances like offices to impress occasional clients, and finding affordable alternatives or replacements.
When you frame your expenses this way and discover you cannot pay for all of them, this is your business' way of showing you something is wrong. Before committing to profit first, your business over ate – binging on expenses.
If you still think you can't grow while being profitable, here are several payment strategies to improve your cashflow. These will help bolster your business so you can make better decisions for the benefit of your business.
Choose your business by securing profit before everything else. This is how you build a sustainable and long-lasting business.
Bonus: what if I become too profitable?
Too profitable? There is no such thing. In any capitalist economy, sooner rather than later, a business (or many) will discover your profit and attempt to take it away. It’s a self-righting mechanism.
Your profit is simply a tool to help your business adapt and attempt to out-innovate those would-be competitors. If you get comfortable, someone will eat your lunch. It happens every day.
When profit is confused with greed
I like profit but I’ve never seen myself as greedy. It’s the cornerstone of a viable and well-run business.
Profits allow you to have a positive effect on your family and community. Greed means you win at the expense of others.
When you place profit and greed in the same bucket, you’re condemning your actions as well as all the other business leaders that came before you and left this world better than they found it.
Sure; we can all point out a few rotten apples along the way. But, by and large, business is used to create better outcomes for customers. If and when you feel otherwise, vote with your wallet.
The only time voting with your wallet doesn’t work is when you’re dealing with a government-sanctioned, local monopoly. In my case, it's the servicer of the community well in my neighborhood. They provide dirty water to me and I cannot drill my own well, connect to another water source, or choose another service provider. My only recourse was to install an expensive water filtration system so I can actually drink the water that I’m forced to purchase.
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