Profitability is hard work.
It’s not something that’s inevitable if you run your business efficiently, and it’s not something that happens by accident if you make smart decisions. Profitability has to be planned for, accounting for several components and interacting moving parts inside the business.
The Key to Profitability
The profit formula that works its way through financial statement is the relationship between revenue costs and expenses. Therefore planning your revenue and planning the costs to ultimately get a gross margin percentage is a key component of planning for profitability. Managing expenses, primarily people costs, and knowing the relationship of those costs to revenue helps you know what needs to be properly managed and planned for to yield profitability.
Many businesses simply don’t plan for profitability. They take things as they come, or presume it’ll happen naturally, or decide to prioritize other concerns first. Chances are you’re not going to see profitability because there’s just too many control items that will yield expenses that you didn’t anticipate, or will yield costs that you didn’t anticipate, or will yield revenue that wasn’t hit. Every day businesses are fighting an economic reality that expenses rise to meet income.
Creating a Culture of Profitability
Companies need to build a culture of budgeting and planning in order to build a culture of profitability. This is ideally proactive, because being strapped for cash all the time does not allow for good decision making in a business.
One of the largest expenses in a business are people costs, so it’s important that everybody on your team understands their role and relationships to others on the team to creating profit. This helps everybody move in the same direction at the same time. This will often require better exposure to company financials and trends in real time. This transparency can help the visionary leader stay grounded in economic realities, and help rank-and-file employees who aren’t close to regular financial reporting develop a better sense of the complete picture.
Grow your business profitably – don’t just grow your business. Failure to keep profitability in mind as you grow puts a company in constant spending mode – and as expenses rise to meet income, it puts greater strain on resources to acquire new investments or debt. A profitable business is intentional, self-aware, and directional from the top leadership down on making the best decisions possible to maximize opportunities.