Profits

Your ultimate goal is to make your product yield a profit. Obvious, right? So much so that it’s not worth mentioning? Well, yes and no. I’m always surprised to discover how many entrepreneurs take their eyes off this ball, elementary as it is. So I’ll go ahead and restate the obvious: The sustainability of your enterprise is wrapped around achieving profits. How much and how soon, of course, depends on your product, your resources, the competition, your strategy, and other factors.

If your cash is limited, you will need profits quickly—that is, before your company runs out of cash. As far as I’m concerned, “trophy” customers and market share are secondary considerations. If your product is unique and the economy is strong, you are likely to command high prices and high profits.

Profits, prices, and service: all are more or less jumbled together in a confusing bundle, and it’s your job to find a thread-end and untangle it. For example, if you make your product overseas instead of at home, your costs are likely to be lower and your profits higher. But as a result, you may well have a longer lead time requirement in shipping reorders. That raises the question: Can your customers accept this reorder time? If not, you might opt for local manufacturing.

In looking at profit questions, you absolutely must know your product costs. And after you’ve determined your costs, you’ll have to settle on the profit margin your product must yield in light of your company’s overhead and sales projections. Product profit margins can be the key to your growth—and indeed, your survival. A lower overhead with high percentages of variable costs can sustain a lower profit margin, which may in fact be dictated by your product’s competitors in the marketplace. High product profits may steer you to smaller niche markets which may have more long-term sustainability than, say, retailers who see themselves as “fashion retailers” and thus change their products often. In fact, they sometimes change for change’s sake, even if the current product is selling well.

There are many reasons why entrepreneurs get distracted and lose their focus on profits. Some of these are external. For example, the Inc. 500 listing—that magazine’s annual list of the 500 fastest-growing companies in the United States—uses sales as the sole measurement for their selection. Profits are nowhere considered. It would be very interesting to look back and see how many companies crash and burn after making the Inc. 500 list, and to ask whether those casualties had failed to pay attention to profits.

Of course, it’s very tempting to trumpet your soaring sales figures and downplay the importance of profits. Sometimes that’s a strategic call. But at other times, it’s an ego thing: “Look at us; we’re growing like crazy!” Eventually, though, this falls into the same category as other ego excesses: measuring your business by the size of your showroom, by the quality of furnishings in your corporate offices, by the kind of car you drive, or whatever.

My advice, therefore, is to put profits first. Indulge yourself with ego trophies only after you’ve created substantial profits. If you’re tempted to follow a market share strategy, make sure you have adequate capital to survive up to the point when you’re finally making a buck. Otherwise, set proper profit margins and make them a high priority in your thinking. Revisit the issue of margins and overhead regularly, in light of all the changes that may occur. These changes can be in costs, competition, economy, supply, strategy, your own resources, etc. You should always be able to answer this simple question: Are we making money?