The Lost Art of Profit

Today’s small business environment has been polluted by the coronation of the “entrepreneur.” The “entrepreneur” is the business owner who takes their concept and through new age promotion has created a larger than life business that he then sells for millions. This is so wrong on so many levels and it does not apply to virtually anyone you will ever know—including yourself.

FACT: Most small businesses will never be sold for more than their asset value.

FACT: The rich IPO’s are concentrated in technology—if you aren’t a computer or internet wiz, or a biotech engineer forget it.

FACT: The vast majority of jobs in our country are not in sexy start-ups—they are in boring, old small businesses.

When our fathers started a business they started a business doing something that they understood. They understood plumbing, carpentry, farming, electrical—they understood how to make or service something. They started with no money and did the work themselves. They grew slowly taking the money that they made to support their family and to put back into the business. Earning a profit was not optional—if they didn’t make money they didn’t eat. They enlisted their family into the businesses—sometimes of pride and sometimes of necessity. Their off-spring learned the business and it became the father’s dream and objective to build the business so that it could be passed on to their children. Even if they were very successful they probably still leaned to live below their means. They knew that there was a business cycle and that they had to have a strong company with nominal debt so that they could survive the downturns that naturally occur. Although they lack the business tools that are now, in a more complicated world are essential, they learned to understand their cash flow and learned to control their money and operations so that a profit was produced. Without the aid of a computer they made a good living for their family.

But this wasn’t good enough for the 21st century owner. This was old-fashioned. Basic business practices be gone—we no longer have to wait for our riches, we can get them now. You don’t need to build a business over time—just create a model and sell it off! Profit doesn’t matter anymore—just drive sales (or internet hits). Unfortunately, for some this worked; for most it doesn’t. The rules haven’t really changed—we must still earn a profit for a business to work. But this lesson has been abandoned in favor of get rich quick schemes. Time to go back to the basics.

There are six responsibilities of the small business owner. First you must earn a minimum-mandatory profit. In a meeting with a small business owner in July of 2011, this person who I will not name argued this point! “I am an S Corp—we don’t want to make money!” Amazing. One of the obstacles that we face today is how accountants have convinced people to run their business by tax principles—to the point that they don’t even know what “profit” is. And for those who get past their tax accounting, they still don’t have a plan in place to produce their profit—they really don’t understand how a small business owner earns their money. They want to earn it from their job rather than from their business. They don’t understand the difference between profit and cash flow and they really don’t have financial control of their company.

The second responsibility of the owner is to create cost controls to assure the production of that profit and the third is to create an organizational structure of employees that is responsible for the enforcement of those cost controls. You have to have a financial plan designed to produce your desirable, pre-determined result—a budget. Duh. An owner without a budget won’t be an owner for long. Most owners do it intuitively—like the last generation—and therefore are doomed to owning a job. It is from your budget that accountability and incentives within your organizational structure are created. If you own a company you are delegating the responsibility for portions of your budget to your employees and then holding them accountable for it (and rewarding them for exceeding it). This cannot be done until the owner fulfills their first three responsibilities.

The fourth responsibility is to sell—internally and externally. You must sell to your customers and you must sell to your employees. Climbers, campers and quitters alike must be sold on the benefit of doing their job—producing the minimum, mandatory profit. And then—the fifth responsibility—you must keep what you make. Tax and risk management must be regularly addressed. As the old adage goes, “it’s not what you make it’s what you keep that matters.” Lastly you must have fun. Don’t underestimate this one. Most successful owners don’t believe that they go to work—they are having fun.

There is help available for small business owners are ready to “get back to basics” and re-focus on profit. For those who do not, some will survive on hope and luck; and even for those who do there is no guarantee but decide which road you would rather travel.