Too many business owners struggle with the importance of pursuing profit in their businesses. You probably struggle with this in your business, too. Why do I use the word “struggle”? Because there is little reinforcement or support for the importance of profit from bankers, accountants, our professional peers, or even those we spend time with in our personal lives, including family and friends.even our church families. This lack of understanding and support, combined with what you hear 24/7 from news outlets have managed to turn “profit” into a six-letter obscenity. Frankly, our culture knows very little about business, and it’s this underlying knowledge deficit that has made profit synonymous with greed.
But make no mistake: Profit is the most powerful term in the business lexicon. Despite this revelation, we too often forget what profit can do for us in our businesses. Let me define for you why profit must be a prime objective for your business:
Profit increases cash in the business: Profitable businesses grow their cash position if they are not using that money to reduce debt. So if you want more
working capital (and have cash-on-hand for just about anything), profit will create this opportunity.
Profit increases equity in the business: Profitability (flowing into retained earnings) is the primary way to increase equity in your business. The amount of
equity directly impacts leverage and this impacts how fast your revenue can grow.
Profits provide more money for shareholders: When a company is profitable, dividends can be paid to those who have invested in the business. In other words, their risk
can be rewarded.
Profit increases the ability of the company to borrow: The debt-to-worth ratio is one of the key elements lenders look at to determine if a business will be granted
more debt. If the company has three dollars in debt for every dollar in equity, borrowing more money is probably not a viable option. Profit is the key to help
leverage your ability to borrow.
Profit funds growth: Growing revenue creates growth in accounts receivable, inventory and other assets. If one side of the balance sheet grows, the other side
has to keep up and that only happens with increases in liabilities and equity. Businesses that are not profitable will have limits on revenue growth.
Profit pays down debt: Profitable companies will pay down debt much faster than those businesses that are just getting by. Profit becomes cash which can be used to
reduce or pay off debt.
read full article »
